| dc.description.abstract | The study sought to understand the effect of interest rate differential on the foreign exchange
rate in the East African forex market. The development of literature was guided by Interest Rate
Parity (IPR) Theory and the Purchasing Power Parity (PPP) Theory. The descriptive research
design was used in this study. Kenya National Bureau of Statistics (KBA), Central Bank of
Kenya, Bank of Tanzania, Bank of Uganda and the IMF e-library were the sources of
information in the pursuit to establish the effect of interest rate differential on the foreign
exchange rate in East Africa. The study used inflation rates in percentage, interest rates in
percentage, consumer price indices, monthly inter-bank rates and monthly current account
deficit/surplus from 2009-2014. Multiple linear regression was used to model the relationship
between the three explanatory variables and a response variable was used by fitting a linear
equation to observed data. Multiple regression analysis was also used to assess whether
correlation exists. The study found that more than 51% of the variations in the dependent
variables, real interest rate differential, inflation rate and current account deficit/surplus was
attributed to other unknown factors. The main predictor variable of our study in the three
countries (Kenya, Uganda and Tanzania), real interest rate differential, accounted for less than
10% of the variation in the dependent variable, real exchange rate (RER). As a result the
researcher could not be able to find any relationship between real interest rate differential and the
real exchange rate and whether the of theories purchasing power parity (PPP) and interest rate
parity (IRP) hold for this study. The study further suggested that more research be carried out to
bring forth more knowledge to the pool of literature on relationship between real interest rate
differential and real exchange rate. | en_US |
