| dc.description.abstract | The objective of this paper was to test the relevance of the monetary approach to exchange rate determination in Kenya. In particular, the paper was anchored on two theoretical underpinnings, the purchasing power parity theory and the money market equilibrium conditions. The study findings indicate that changes in ratio between Kenya's broad money supply to US broad money does not significantly affect the Ksh/USD nominal exchange rate. This means that the monetary policy approach to exchange rate determination theory is weak when cast on the Kenyan case using the US dollar -Kenya shilling pair of the exchange rate. The estimation was carried out using the Generalized Method of Moments (GMM) in order to reduce any form of multicollinearity in the macroeconomic set of variables
The money supply ratio, despite having the expected sign on its coefficient, is not significant in determining the exchange rate in Kenya. However, the study finds that the significant determinants of the KSH/USD nominal exchange rate are the ratio of domestic to foreign (USA) output and the interest rate differential (using Treasury bill rates) which have negative and positive impacts, respectively. Therefore policies that support relative increase if! economic
activity are beneficial to the strength of the currency. Similarly, the differential between Kenya's Treasury bill rate and the USA Treasury bill rate should be maintained at positive levels if the exchange rate were to remain stable. | en_US |
