| dc.description.abstract | The objective of this research was to investigate the causal relationship between interest
rates and foreign exchange rates in Kenya. The data sources were limited to the nominal
value of exchange rate represented by the Kenya Shilling price of one US dollar and
aggregate interest rate represented by the Treasury bill yield over a 3-month period. The
data set consisted of monthly observations of the nominal value of the daily closing
exchange rate between January 1993 and June 2006. The monthly closing Treasury bill
rates over the same period were used. Testing causal relations between interest rates and
foreign exchange rates (in a bivariate case) were based on comparing the results of
Granger causality test of Granger (1969) based on error correction modelling (ECM)
technique. The series were subjected to tests of stationarity, co-integration, autocorrelation,
and heteroscedasticity.
The findings led to acceptance of the null hypotheses that foreign exchange rates do not
Granger-cause interest rates. On the other hand, after obtaining a significant errorcorrection
term, it was concluded that causality between interest rates and foreign
exchange rates in Kenya is attributable to external factors other than the variables in the
model. It was therefore established that interest rates causes foreign exchange. The
findings agreed with previous empirical studies (Furman and Stiglitz, 1998; Goldfajn and
Gupta, 1999; Cho and West, 2001). | en |
