The Effects of Changes in Exchange Rate on Horticultural Exports Earnings in Kenya

Abstract

The study evaluated the effect of real exchange rate (RER) on the horticultural exports. Empirical evidence revealed that when the RER increases, it implies that the domestic currency depreciates against the foreign currency causing the Kenyan horticultural exports to be cheaper in the international market. As a result, the exports earners more. The study employed the ARDL model after finding that the series were integrated bot at level while other at first order. After conducting the ARDL bound test, the study established that real exchange rate had no co-integration among the other variables in the model. Having establish absence of long run relationship, the study settled for the ARDL in the short run. However, the results were statistically insignificant in line with the Fountas and Aristotelous, (2005)’s findings that more often than not the short run effect of the real exchange rate on the exports in general is usually insignificant. Theoritically, the insignificant findings is not a surprise especially for the risk averse exporters. Increasing the utility of export by increasing the average profits among the risk averse exporters can be approximately offset by te utility decline forllowing the increased uncertainitoes in profits. As a result, a change in the exchange rate volatility can lead in no effect on the trade and in this case horticultural exports. The study also establsihed that for this particular data, there was no unidirectional causality from exhange rate to horticultural. However, the study established the the horticultural exports granger caused the real exchange rate. The study recommendeated the gorvernment to put in place monotoring measures to ensure stability in the real exchange rate that would insitil confidence among the riskl averse exporter.