Import demand elasticities and stability during trade liberalization: a case study of Kenya

Abstract

This paper utilizes an error correction model to estimate demand elasticities for aggregate imports and components in Kenya over 1964-91. The results show the short-run relative price and real income aggregate import demand elasticities to be non-significant or weakly significant. On the other hand, aggregate imports were strongly responsive to lagged forex reserves and forex earnings. The non-significant or weakly significant relative price and real income elasticities suggest that devaluation and stabilization policies pursued in the past did not effectively assist trade liberalization efforts, at least at the rate they were implemented. More generally, they suggest that policies that directly increase export earnings and access to external capital inflows are likely to have a larger impact on import volumes than those that concentrate exclusively on aggregate demand and exchange rate management