A study of the relationship between oil prices, exchange rates and maize prices in kenya

Abstract

World crude prices, exchange rates and maize prices represent three markets namely the oil market, exchange rate market and the commodity market. World crude prices are exogenously determined hence any shock to the system ripples through to consumer prices. Foreign exchange enables international trade through imports and exports of goods and services. Turbulence in the foreign exchange market results in the transmission of volatility into input prices and eventually into product prices. Maize being a staple food in Kenya, serves also as a strategic grain and is heavily weighted in the food basket of the Consumer Price Index (CPI). Price stability is important in ensuring food security. This research aims at finding the linkages between these three markets by using cointegration, Granger Causality and correlation analysis to measure the strength of these relationships to determine what risk management strategies are better suited to hedge against adverse volatility in markets. Descriptive analysis, unit root tests, cointegration tests, Granger Causality tests and correlation analysis tests were conducted. The results show that oil prices, exchange rates and maize prices are cointegrated. Granger Causality tests reveal that exchange rates granger cause oil prices in the 5th and 6th lag hence showing the presence of a strong long-run relationship. Correlation analyses reveal that only exchange rates and maize prices are statistically significant. From the results, various risk management have been recommended.