The determinants of balance of payments performance in Kenya
Abstract
This study assessed the determinants of balance of
payment performance in Kenya
using time-series data for period the1975 – 2012.
The study adopted unrestricted
VAR model which had lag four as the maximum lag to
estimate the relationship
between balance of payments in Kenya and previous b
alances in balance of payments
account, money supply, exchange rate, real interest
rate, terms of trade, openness of
economy, gross capital formation and political inst
ability .
The VAR model showed that all variables and their l
ags were highly significant in
determining the balance of payment in Kenya. The st
udy found a positive relationship
between current balance of payment and previous bal
ance of payment at first, second,
and third lag, differenced money supply at fourth l
ag, differenced exchange rate,
terms of trade at second lag, differenced openness
of economy at third and fourth lags,
real interest rate at second and fourth lags and gr
oss capital formation at fourth lag.
On the other hand, negative relationship was found
between current balance of
payments and previous balance of payment at fourth
lag, a differenced money supply
at first, second and third lags, terms of trade at
first and third lags, differenced
openness of economy at first and second lags, real
interest rate at first and third lags,
gross capital formation at first, second and third
lags and all lags of political
instability.
The study recommended that the Government of Kenya
, Central Bank of Kenya, all
financial institutions and other stakeholders whose
activities influence money supply,
terms of trade, openness of economy, real interest
rate, gross capital formation, and
political instability ought to apply relevant polic
y measures for better management of
Kenya’s balance of payment.
Publisher
University of Nairobi