You are on page 1of 13

INFLUENCE OF EXCHANGE RATE DETERMINANTS ON THE PERFORMANCE

OF COMMERCIAL BANKS IN KENYA


Ongeri Hezekiah Otuori, Kenya
Cite this Paper: Otuori, O. H. (2013). Influence of exchange rate determinants on the
performance of commercial banks in Kenya. European Journal of Management Sciences and
Economics, 1(2), 86-98.
ABSTRACT
Exchange rates in Kenya have been fluctuating over the last few years with a rising trend.
According to the data from the Central Bank of Kenya, the exchange rate for the US dollar
was 63.3 in 2007, 78.0 in 2008, 75.4 in 2009, 80.6 in 2010 and 80.6 in December 2011. This
shows a weakening shilling from 2007-2011 and also shows that the exchange rate has
fluctuated over the same period. These fluctuations may be caused by a number of factors
such as interest rates, inflation rates, terms of trade, and public debt. This study sought to
investigate the determinant factors of exchange rates and their effects on the performance of
commercial banks in Kenya. The study adopted a descriptive design and primary data was
collected through self administered questionnaires. The results showed that interest rate and
external debt had positive and significant effects on performance while inflation rate and
external debt had negative and significant effects on performance. The study concluded that
higher levels of interest rate lead to higher profitability in commercial banks in Kenya. The
study further concluded that higher levels of inflation rate result in lower bank profitability in
Kenya. The study also concluded that higher levels of external debt result in lower bank
profitability in Kenya. Lastly, the study concluded that higher levels of exports and imports
lead to higher profitability in commercial banks. The study recommends that the Central
Bank of Kenya should set base lending rates that can help the banks profitable while at the
same time not punitive to the borrowers. Secondly, the study recommends that inflation rate
should be contained through sound policy measures as higher inflation rates may hurt the
performance of the banking industry in Kenya. Thirdly, the study recommends that it is
important that the Government addresses the issue of burgeoning external debt as higher
external debts hurt the performance of commercial banks in Kenya. Finally, the study
recommends that the Government should put up more measures to increase the countrys
exports as this will go a long way in improving the performance of commercial banks in
Kenya.
Keywords: Interest rates, Inflation rates, External debt, Exports, Imports, Exchange rates,
bank performance.
INTRODUCTION
The adverse consequences of exchange rate volatilities on various parts of the domestic
economy have now been well documented in numerous research works. In particular, a rise in
exchange-rate volatilities has been found to have negative consequences on the trade sector
(i.e. exports and imports) of the local economy (McKenzie (1999), Chou (2000),
Rahmatsyah, et al, (2002) and Siregar & Rajan (2004)). A similar message was conveyed in a
recent paper of Calvo & Reinhart (2002). They show that the monetary authority needs to
intervene and manage the fluctuation of the local currency in order to achieve its desired level
of inflation target.
Background of the study

86

Due to its widespread economic implication, evaluating causes and determinants of exchange
rate volatilities has accordingly remained one of the key research agenda for both academics
and policy makers. Several attempts have been made recently to particularly examine the role
of external debt/borrowing in explaining the fluctuations of the local currency. For instance,
Corsetti et al. (1999) argued that external borrowing, particularly by private commercial
banks and firms is among the key factors responsible for the severity of the East Asian
financial and currency crises during the late 1990s.
Providing a more in-depth look at the features of currency crises, Cavallo, et al. (2002)
developed a model that suggests the size of foreign currency denominated debt of a country
contributes to the occurrences of exchange rate overshooting, sudden stop of capital flows
and output drop in the domestic economy. Cavallo (2005) further argues that the exposure to
foreign currency liabilities magnify the cost of exchange rate depreciation. Likewise,
Devereux & Lane (2001) underline the need to extend the list of variables important for
understanding bilateral exchange rate volatility beyond those suggested by optimal currency
area theory. Their study shows that for developing countries, in particular, volatility in their
bilateral exchange rates is strongly and negatively affected by the stock of external debt.
The banking industry in Kenya
The Companies Act, the Banking Act, the Central Bank of Kenya Act and the various
prudential guidelines issued by the Central Bank of Kenya (CBK), governs the Banking
industry in Kenya. The banking sector was liberalised in 1995 and exchange controls lifted.
The CBK, which falls under the Minister for Finances docket, is responsible for formulating
and implementing monetary policy and fostering the liquidity, solvency and proper
functioning of the financial system. The CBK publishes information on Kenyas commercial
banks and non-banking financial institutions, interest rates and other publications and
guidelines. The banks have come together under the Kenya Bankers Association (KBA),
which serves as a lobby for the banks interests and addresses issues affecting its members.
(CBK, 2008).
According to the Central Bank of Kenya, there are 43 licensed commercial banks in Kenya.
Three of the banks are public financial institutions with majority shareholding being the
Government and state corporations. The rest are private financial institutions. Of the private
banks, 27 are local commercial banks while 13 are foreign commercial banks. Commercial
banks in Kenya play a major role in Kenya. They contribute to economic growth of the
country by making funds available for investors to borrow as well as financial deepening in
the country. Commercial banks therefore have a key role in the financial sector and to the
whole economy
.
Statement of the problem
A number of international studies have been done in this regard. In a study in Uganda by
Mbire & Atingi (1997), on growth and foreign debt, it was found that an appreciation in real
exchange rate would worsen the debt-export ratio. Similar results have been found by
Corsetti et al (1999), Kawai (2002), and Cavallo et al. (2002). Henckel (2004) investigated
how government debt affects exchange rate behaviour using a two-country general
equilibrium and found that the exchange rate was directly related to the effective price of
public debt. A study by Siregar & Pontines (2005) on external debt and exchange rate
overshooting in East Asian countries found that the accumulation of external debts in these

87

economies have indeed been partly responsible for the increasing incidence and severity of
exchange rate overshooting of the local currency.
Empirical studies on the same in Kenya did not yield any fruitful results. This is despite the
numerous studies on exchange rate such as Nyamute (1998) on inflation rate, treasury bills
rate and exchange rates. Other include Kisaka (1999) on the causal relationship between
exchange rates and stock prices in Kenya, Wambua (2006) on interest rates and exchange
rates, Nyachieo (2008) on exchange rates and volume of horticultural exports, Nyamwange
(2009) on real exchange rates and international trade, Opati (2009) on inflation and exchange
rates, Maina (2010) on exchange rate variability and investment decisions. Thus it suffices to
conclude here that no study exists on the influence of exchange rates on the performance of
commercial banks Kenya. This is the gap the present study seeks to bridge. The study poses
the question: what is the influence of exchange rate determinants on the performance of
commercial banks in Kenya? The study seeks to answer this question by performing an
empirical analysis with a linear regression.
Research Objectives
General Objective
The main objective of this study is to determine the influence of exchange rate determinants
on the performance of commercial banks in Kenya.
Specific Objectives
i.
To determine how interest rates as a determinant of exchange rates affects the
performance of commercial banks in Kenya.
ii.
To establish how inflation rates as a determinant of exchange rates affects the
performance of commercial banks in Kenya
iii.
To find out how external debt as a determinant of exchange rates affects the
performance of commercial banks in Kenya
iv.
To ascertain how exports and imports as a determinant of exchange rates affects
the performance of commercial banks in Kenya
Research Questions
i.
What effect do interest rates as determinants of exchange rates have on the
performance of commercial banks in Kenya?
ii.
What effect do inflation rates as determinants of exchange rates have on the
performance of commercial banks in Kenya?
iii. What effects does external debt as determinants of exchange rates have on the
performance of commercial banks in Kenya?
iv.
What consequences do imports and exports as determinants of exchange rates have on
the performance of commercial banks in Kenya?
Importance of the study
This study will be beneficial to Commercial Bank managers as it will help them better
understand the determinant factors of exchange rates and their effects on their banks
performance. This study will also guide policy makers in the banking sector especially the
Central Bank of Kenya and the Treasury in coming up with policies which will manage
exchange rates and spur growth and profitability in this sector. Researchers and academicians

88

in the field of finance, economics and banking will find this study a useful guide for carrying
out further studies in the area.
THEORETICAL REVIEW
Interest Rate Parity and Interest Rates
The interest rate parity condition was developed by Keynes (1923), as what is called interest
rate parity nowadays, to link the exchange rate, interest rate and inflation. The theory also has
two forms: covered interest rate parity (CIRP) and uncovered interest rate parity (UCIRP).
CIRP describes the relationship of the spot market and forward market exchange rates with
interest rates on bonds in two economies. UCIRP describes the relationship of the spot and
expected exchange rate with nominal interest rates on bonds in two economies.
This is the normal form of the covered interest rate parity, which states that the domestic
interest rate must be higher than the foreign interest rate by an amount equal to the forward
premium (discount) on domestic currency. According to CIRP, if the exchange rate of, say,
the shilling against the USD is fixed, the interests of the two countries should be equal. Thus,
a small country with a pegged exchange rate regime cannot carry out monetary policy
independently.
Empirically, using weekly observations from January 1962 to November 1967, Frenkle &
Levich (1975) confirmed that CIRP held. Later (1977) they extended their studies into three
periods: 196267, known as the tranquil peg; 196869, the turbulent peg; and 1973
1975, the managed float, and strengthened the findings of their previous study that CIRP still
holds during these periods even when the effect of transaction costs is taken into account.
They indicated that deviations from CIRP might occur due to four major reasons: transaction
costs, political risk, potential tax advantages, and liquidity preference.
However, investors face uncertainty over future events. In a rational expectation framework,
the forward exchange rate may be strongly influenced by the market expectations about the
future exchange rate if new information is taken into consideration. In an uncertain
environment, an un-hedged interest rate parity condition may hold. Very few empirical
studies support UCIRP. For example, using a K-step-ahead forecasting equation and
overlapping techniques on weekly data of seven major currencies, Hansen & Hodrick (1980)
reject the market efficiency hypothesis for exchange.
Purchasing Power Parity and Inflation rates
The starting point of exchange rate theory is purchasing power parity (PPP), which is also
called the inflation theory of exchange rates. PPP can be traced back to sixteen-century Spain
and early seventeen century England, but Swedish economist Cassel (1918) was the first to
name the theory PPP. Cassel once argued that without it, there would be no meaningful way
to discuss over-or-under valuation of a currency. Absolute PPP theory was first presented to
deal with the price relationship of goods with the value of different currencies. The theory
requires very strong preconditions. Generally, Absolute PPP holds in an integrated,
competitive product market with the implicit assumption of a risk-neutral world, in which the
goods can be traded freely without transportation costs, tariffs, export quotas, and so on.
However, it is unrealistic in a real society to assume that no costs are needed to transport
goods from one place to another. In the real world, each economy produces and consumes
tens of thousands of commodities and services, many of which have different prices from

89

country to country because of transport costs, tariffs, and other trade barriers (Kanamori &
Zhao, 2006).
Absolute PPP is generally viewed as a condition of goods market equilibrium. Under absolute
PPP, both the home and foreign market are integrated into a single market. Since it does not
deal with money markets and the balance of international payments, we consider it to be only
a partial equilibrium theory, not the general one. Perhaps because absolute PPP require many
strong impractical preconditions, it fails in explaining practical phenomenon, and signs of
large persistent deviations from Absolute PPP have been documented (Kanamori & Zhao,
2006).
The Balassa-Samuelson Model and External Debt
The standard version of the B-S model is presented using a single-factor aggregate production
function in Obstfeld & Rogoff (1996). The Balassa-Samuelson model is one of the
cornerstones of the traditional theory of the real equilibrium exchange rate. The key empirical
observation underlying the model is that countries with higher productivity in tradables
compared with non-tradables tend to have high price levels. The B-S model hypothesis states
that productivity gains in the tradable sector allow real wages to increase commensurately
and, since wages are assumed to link the tradable to the non-tradable sector, wages and prices
also increase in the non-tradable sector. This leads to an increase in the overall price level in
the economy, which in turn results in an appreciation of the real exchange rate.
However, the shortcomings of this model are clear. First, it assumes that the tradable price at
home is the same as that abroad. This is clearly an unrealistic special form of PPP, but for
tradable goods only. Under this setting, how the prices of tradables are determined remains
unknown. Second, since it says nothing about the demand side, it is criticized by the
Keynesian school, which regards price to be rigid or sticky. Third, without considering the
behavior of consumers, or the demand side, it is difficult to interpret how market prices are
formed. Last and most importantly, this model does not deal with the role of money; it can at
best explain partly how the real exchange rate is determined (Holub & Cihak, 2003;
Kanamori & Zhao, 2006).
Integrating the model with a model of accumulation of capital and with the demand side of
the economy, Holub & Cihak (2003) claimed that that the predictions of their model were
generally consistent with empirical findings for Central and Eastern European countries. But
the extended model still does not have room for money and the nominal exchange rate. This
implies that money is assumed out of this kind of model and that prices are assumed to be
flexible enough to adjust to supply and demand.
The Balance of Payments Theory
The balance of payments theory of exchange rate is also named as General equilibrium
theory of exchange rate. According to this theory, the exchange rate of the currency of a
country depends upon the demand for and supply of foreign exchange. If the demand foreign
exchange is higher than its supply, the price of foreign currency will go up. In case, the
demand of foreign exchange is lesser than its supply, the price of foreign exchange will
decline (Kanamori & Zhao, 2006). The demand for foreign exchange and supply of foreign
exchange arises from the debit and credit items respectively in the balance of payments. The
demand for foreign exchange comes from the debit side of balance of payments. The debit

90

items in. the balance of payments are (1) import of goods and services (2) Loans and
investments made abroad (Kanamori & Zhao, 2006).
The supply of foreign exchange arises from the credit side of the balance of payments. It is
made up of the exports of goods and services and capital receipts. If the balance of payments
of a country is unfavorable, the rate of foreign exchange declines. On the other hand, if the
balance of payments s favorable, the rate of exchange will go up. The domestic currency can
purchase more amounts of foreign currencies (Kanamori & Zhao, 2006).
When the exchange rate of a country falls below the equilibrium exchange rate, it is a case of
adverse balance of payments. The exports increase and eventually the adverse balance of
payment is eliminated. The equilibrium rate is restored. When the balance of payments of a
country is favorable, the exchange rate rises above the equilibrium exchange rate resulting in
the decline of exports (Kanamori & Zhao, 2006).
Conceptual Framework
Independent variables

Dependent Variables

Interest Rates

Inflation Rates
External Debts

Performance of Commercial
Banks

Exports and Imports

Empirical Review
Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest
rates, central banks exert influence over both inflation and exchange rates, and changing
interest rates impact inflation and currency values. Higher interest rates offer lenders in an
economy a higher return relative to other countries. Therefore, higher interest rates attract
foreign capital and cause the exchange rate to rise. The impact of higher interest rates is
mitigated, however, if inflation in the country is much higher than in others, or if additional
factors serve to drive the currency down. The opposite relationship exists for decreasing
interest rates - that is, lower interest rates tend to decrease exchange rates (Bergen, 2010).
Karfakis & Kim (1995) using Australian exchange rate data found that unexpected current
account deficit is associated with exchange rate depreciation, and a rise in interest rates.
Evidence is found that current account deficits diminishes domestic wealth, and may lead to
overshooting of exchange rates. A fall in the real value of currency was also reported by
Obstfeld & Rogoff (1995), Engel & Flood (1985), and Dornbusch &Fisher (2003). There has
also been a surge and collapse in international capital flows into developing countries in the
recent decades. Sudden outflow of capital is another major concern when it can drastically

91

affect exchange rates as were witnessed during several financial crises of Brazil, East Asia,
and Mexico. These capital outflows affect domestic output, real exchange rates, capital and
current account balances for years after the crises.
Inflation Rates
As a general rule, a country with a consistently lower inflation rate exhibits a rising currency
value, as its purchasing power increases relative to other currencies. During the last half of
the twentieth century, the countries with low inflation included Japan, Germany and
Switzerland, while the U.S. and Canada achieved low inflation only later. Those countries
with higher inflation typically see depreciation in their currency in relation to the currencies
of their trading partners. This is also usually accompanied by higher interest rates (Bergen,
2010).
External Debt
According to Bergen, (2010), countries will engage in large-scale deficit financing to pay for
public sector projects and governmental funding. While such activity stimulates the domestic
economy, nations with large public deficits and debts are less attractive to foreign investors.
This is because a large debt encourages inflation, and if inflation is high, the debt will be
serviced and ultimately paid off with cheaper real dollars in the future.
Exports and Imports
According to Solnik (2000) the balance of payments approach was the first approach for
economic modeling of the exchange rate. The balance of payments approach tracks all of the
financial flows across a countrys borders during a given period. All financial transactions
are treated as a credit and the final balance must be zero. Types of international transactions
include: international trade, payment for service, income received, foreign direct investment,
portfolio investments, short- and long-term capital flows, and the sale of currency reserves by
the central bank.
A ratio comparing export prices to import prices, the terms of trade is related to current
accounts and the balance of payments. If the price of a country's exports rises by a greater
rate than that of its imports, its terms of trade have favorably improved. Increasing terms of
trade, shows greater demand for the country's exports. This, in turn, results in rising revenues
from exports, which provides increased demand for the country's currency (and an increase in
the currency's value). If the price of exports rises by a smaller rate than that of its imports, the
currency's value will decrease in relation to its trading partners (Solnik, 2000).
Research Methodology
This research study adopted a descriptive study design. A sample size of 60% from every
bank tier was selected to come up with a total sample of 27 banks. Primary data was collected
using a questionnaire while secondary data was collected from various websites such as
World Bank website, the Central Bank of Kenya, and the Kenya National Bureau of
Statistics.
This research was based on the following empirical model:
Y = a - b1X1- b2X2 - b3X3 - b4X4 +
Where

92

Y
X1
X2
X3
X4
a

is measured by the profitability of the commercial banks


is External debt defined as the total annual debt stock. This is expected to have a
negative effect on exchange rate.
is the inflation rate defined as the annual inflation rate. This is expected to have a
negative effect on exchange rate.
is the interest rate defined as the average annual lending interest rate. This is expected
to have a negative effect on exchange rate.
is Exports and Imports measured as the ratio of export to import prices. This is
expected to have a negative effect on exchange rate.
is the constant or intercept
is the error term

The data was entered into the Statistical Package for Social Sciences (SPSS) and analysed
using descriptive, correlation and regression analyses. The correlation coefficients from the
regression shows the effect (whether positive or negative) of the independent variables on the
dependent variable. T-tests were used to show the significance of the relationship between the
determinant factors and exchange rate. Significance of the relationships was tested at 95%
confidence level.
Results and Discussion
Correlation and Regression Results
The correlation analysis was done for all the independent variables and the dependent
variable in the study. The dependent variable was performance (ROA) while the independent
variables were interest rate, inflation rate, external debt, and imports & exports. This analysis
was carried out in order to determine whether there were serial correlations between the
independent variables. As serial correlations are a problem when performing regression
analysis, this preliminary test was carried out first.
Table 1: Correlation Matrix of Independent Variables
Performanc
Interes
Inflatio
e
t Rate
n Rate

Performanc
e

Interest
Rate

Inflation
Rate

Pearson
Correlatio
n
Sig.
(2tailed)
Pearson
Correlatio
n
Sig.
(2tailed)
Pearson
Correlatio
n
Sig.
(2tailed)

Externa
l Debt

.346*

-.230*

-.401*

Export
s and
Import
s
.641*

.102

.501

.121

.006

.612

.354

-.447

.114

.011

.110

.658

-.646

.139

.064

93

External
Debt

Exports and
Imports

Pearson
Correlatio
n
Sig.
(2tailed)
Pearson
Correlatio
n
Sig.
(2tailed)

-.695

.018
1

The results show that there were low correlation between the independent variables and
therefore no serial correlations between the variables. None of the correlations between the
independent variables was significant. On the other hand, the independent variables all had
significant effects on performance as measured by ROA. Inflation rate and external debt had
negative correlations with performance while interest rate and exports & imports had positive
correlations with performance.
Table 2:

Effects of exchange rate determinants on bank performance


Return on Equity
Constant
1.192
Interest Rate
1.427 (.002)
Inflation Rate
-1.664 (.001)
External Debt
-1.924 (.021)
Exports and Imports
0.748 (.016)
R
.936
R2
.876
F
2.676 (.001)
The study sought to determine the relationship between interest rate and bank profitability in
Kenya. The results show that interest rate had a positive and significant effect on bank
profitability ( = 1.427). This effect was significant at 5% level of confidence. What this
means is that higher levels of interest rate lead to higher profitability in commercial banks.
This is consistent with the findings of Bergen (2010).
The study sought to determine the relationship between inflation rate and bank profitability in
Kenya. The study found that inflation rate had a negative and significant effect on bank
profitability ( = -1.664). This effect was significant at 5% level of confidence. These results
mean that higher levels of inflation rate result in lower bank profitability. This is consistent
with the findings of Bergen (2010) who noted that countries with higher inflation typically
see depreciation in their currency in relation to the currencies of their trading partners.
The study sought to determine the relationship between external debt and bank profitability in
Kenya. From the regression analysis, the results show that external debt had a negative and
significant effect on bank profitability ( = -1.924). This effect was significant at 5% level of
confidence. These results mean that higher levels of external debt result in lower bank
profitability. This is consistent with the findings of Bergen (2010) who concluded that nations
with large public deficits and debts are less attractive to foreign investors.

94

The study sought to determine the relationship between exports & imports and bank
profitability in Kenya. The results show that exports and imports had a positive and
significant effect on bank profitability ( = 0.748). This effect was significant at 5% level of
confidence. What this means is that higher levels of exports and imports lead to higher
profitability in commercial banks. ). This is consistent with Solnik (2000) who noted that if
the price of exports rises by a smaller rate than that of its imports, the currency's value will
decrease in relation to its trading partners.
The study found that the independent variables had a very high correlation with ROA (R =
0.936). The results also show that the variables accounted for 87.6% of the variance in ROA
(R2 = 0.876). ANOVA results show that the F statistic was significant at 1% level. Therefore,
the model was fit to explain the relationships.
CONCLUSIONS
The study found that interest rate had a positive effect on bank performance in Kenya. The
study therefore concludes that higher levels of interest rate lead to higher profitability in
commercial banks in Kenya. The study found that inflation rate had a negative effect on firm
performance in Kenya. It is therefore concluded that higher levels of inflation rate result in
lower bank profitability in Kenya. The study found that external debt had a negative effect on
bank profitability in Kenya. The study therefore concludes that higher levels of external debt
result in lower bank profitability in Kenya. The study found that exports and imports had a
positive effect on bank profitability in Kenya. The study therefore concludes that higher
levels of exports and imports lead to higher profitability in commercial banks.
RECOMMENDATIONS
The study recommends that the Central Bank of Kenya should set base lending rates that can
help the banks profitable while at the same time not punitive to the borrowers. This will help
grow the credit market in Kenya and hence develop the economy. Secondly, the study
recommends that inflation rate should be contained through sound policy measures as higher
inflation rates may hurt the performance of the banking industry in Kenya. Thirdly, the study
recommends that it is important that the Government addresses the issue of burgeoning
external debt as higher external debts hurt the performance of commercial banks in Kenya.
Lastly, the study recommends that the Government should put up more measures to increase
the countrys exports as this will go a long way in improving the performance of commercial
banks in Kenya.
REFERENCES
Bergen, J.V. (2010) 6 Factors That Influence Exchange Rates, Investopedia,
http://www.investopedia.com/articles/basics/04/050704.asp#axzz288SmcagR
Calvo, G.A., & Reinhart, C.M. (2002), Fear of Floating, Quarterly Journal of Economics,
117 (2), pp. 379-408.
Carrera, J. & Restout, R. (2008), Long-run determinants of Real Exchange rate in LatinAmerica, GATE (Groupe dAnalysis de thory Economique) Working paper 08-11
Cassel, G. (1918). Abnormal Deviations in International Exchanges, Economic Journal.
December, 28, pp. 41315.

95

Cavallo, M. (2005), To Float or Not to Float? Exchange Rate Regimes and Shocks, The
Federal Reserve Bank of San Francisco (FRBSF) Economic Letter, No.2005-01
(January).
Cavallo, M., Kisselev, K., Perry, F., & Roubini, N. (2002), Exchange Rate Overshooting and
the Costs of Floating, mimeo, New York University.
Central Bank of Kenya (2012) Bank Supervision Annual Report, CBK
Chou, W. (2000), Exchange Rate Variability and Chinas Exports, Journal of Comparative
Economics, 28, pp.61-79.
Corsetti, G., Pesenti, P. & Roubini, N. (1999), What caused the Asian Currency and Financial
Crisis?, Japan and the World Economy, 11, pp. 305-373.
Cumby, R. E., & Obstfeld, M. (1981). A Note on Exchange-Rate Expectations and Nominal
Interest Differentials: A Test of the Fisher Hypothesis. Journal of Finance 36 (June):
697-704.
Devereux, M.B., & Lane, P.R. (2001), Understanding Bilateral Exchange Rate Volatility,
mimeo. New York University.
Dornbusch, R., & Fisher, S. (2003). International Financial Crisis, CESifo Working Paper,
no. 926.
Drine, I & Rault, C (2001) How sure are we about the Balassa-Samuelson hypothesis ? Time
Series versus Panel Data Approach for Asian countries EUREQua, Sorbonne
University and CNRS
Edwards, S (1989). Real Exchange Rates, Devaluation and Adjustment. Cambridge,
Massachusetts. The MIT Press.
Engel, C. M., & Flood, R. P. (1985). Exchange Rate Dynamics, Sticky Prices and the Current
Account, Journal of Money, Credit, and Banking, vol. 17, no. 3, pp. 312-327
Frenkel, J. A. & Levich, R. M. (1975), Covered Interest Arbitrage: Unexploited Profits?,
Journal of Political Economy 83, 325-338.
Gertz, G. (2008). Kenyas Trade Liberalization of the 1980s and 1990s: Policies, Impacts,
and Implications, Carnegie Endowment for International Peace, pp 8 22
Hansen, L. P. & Hodrick, R. J. (1980). Forward Exchange Rates as Optimal Predictors of
Future Spot Rates: An Econometric Analysis. Journal of Political Economy 88: 82953.
Henckel, T. (2004). Default on Government Debt and Exchange Rate Dynamics,
Econometric Society 2004 Australasian Meetings 269, Econometric Society.
Hoffmann, M., & MacDonald, R. (2003). A Re-Examination of the Link Between Real
Exchange Rates and Real Interest Rate Differentials, CESifo Working Paper, no. 894.
Holub, T., & ihk, M. (2003), Price Convergence to the EU: What Do the 1999 ICP Data
Tell Us?, Working Paper No. 2/2003, Prague: Czech National Bank
IMF, (2001) The Challenge of Maintaining Long-Term External Debt Sustainability.
Prepared by the Staffs of the World Bank and the International Monetary Fund
accesed on 10th September 2012
Juthathip, J. (2009) Equilibrium Real Exchange Rate, Misalignment and Export Performance
in Developing Asia, World Economy
Kanamori, T. & Zhao, Z. (2006) The Renminbi Exchange Rate Revaluation: Theory,
Practice, and Lessons from Japan, ADBI policy papers; no. 9.
Karfakis, C., & Kim, S.J. (1995). Exchange Rates, Interest Rates and Current Account News:
Some Evidence from Australia, Journal of International Money and Finance, vol. 14,
no. 4, pp. 575-595.
Keynes, J.M (1923), A Tract on Monetary Reform, London, Macmillan
Kisaka, S. (1999) The Causal Relationship between Exchange Rates and Stock Prices in
Kenya Unpublished MBA Project, University of Nairobi.

96

Korsu, R.D. & Braima, S.J. (2009) The Determinants of the Real Exchange Rate in Sierra
Leone, Department of Economics, Fourah Bay College, University of Sierra Leone.
Maina, I.K. (2010) The Study of the Impact of Exchange Rate Variability on Investment in
the Electric Power Sub-Sector in Kenya, Unpublished MBA Project, University of
Nairobi.
Mbire, B., & M. Atingi (1997). Growth and Foreign Debt: The Ugandan Experience. AERC
Research Paper No. 66. Nairobi: African Economic Research Consortium.
McKenzie, M. (1999), The Impact of Exchange Rate Volatility on International Trade Flows,
Journal of Economic Surveys, Vol. 13, 1, pp. 71-107.
Moosa, I.A. & Bhatti, R.H. (2010) The Theory and Empirics of Exchange Rates. World
Scientific Inc, Portland.
Mungule, k.O (2004) The determinants of the real exchange rate in Zambia. Department of
Economics. The University of Zambia. AERC Research
Mwega, Francis M. & Njuguna S. Ndungu (2008), Explaining African Economic Growth
Performance: The Case of Kenya In B. J. Ndulu, S. A. OConnell, J.-P. Azam, R. H.
Bates, A. K. Fosu, J. W. Gunning, & D. Njinkeu, eds, The Political Economy of
Economic Growth in Africa, 1960-2000. Volume 2: Country Case Studies
(Cambridge: CUP): 325-68
Ngugi, R.W. & J.W. Kabubo. (1998). Financial Sector Reforms and Interest Rate
Liberailzation: The Kenya Experience. AERC Research Paper 72. Nairobi: African
Economic Research Consortium.
Nyachieo, P.M. (2008) The Impact of Changes in Foreign Exchange Rates on Volume Of
Horticultural Exports in Kenya, Unpublished MBA Project, University of Nairobi.
Nyamute, M.N. (1998) The Relationship Of The Nse Index Of Major Economic Variables:
Inflation Rate Money Treasury Bills Rate And Exchange Rate, Unpublished MBA
Project, University of Nairobi.
Nyamwange, C. (2009) The Relationship between Real Exchange Rates & International
Trade in Kenya Unpublished MBA Project, University of Nairobi
Obstfeld, M., & Rogoff, K. (1995). Exchange Rate Dynamics Redux, The Journal of Political
Economy, vol. 103, no. 3, pp. 624-660.
Opati, B.J.D. (2009) A Study on Casual Relationship between Inflation and Exchange Rates
in Kenya, Unpublished MBA Project, University of Nairobi.
Patnaik, I & Pauly, P (2000) The Indian Foreign Exchange Market and the Equilibrium Real
Exchange Rate of the Rupee, NCAER , Discussion Paper Series , No. 12
Pollin, R, & Heintz. J (2007). Expanding Decent Employment in Kenya: The Role of
Monetary Policy, Inflation Control, and the Exchange Rate. International Poverty
Center Country Study No.6, United Nations Development Programme.
Rahmatsyah, T., Rajaguru, G. & Siregar, R. (2002) Exchange Rate Volatility, Trade and
Fixing for Life in Thailand, Japan and the World Economy, 14, 445-470.
Samara, A.M. (2009). The Determinants of Real Exchange Rate Volatility in the Syrian
Economy. International Macroeconomics
Sfia, M.D & Mouley, S. (2009) Determinants of Exchange Rate Practices in the MENA
Countries: Some Further Empirical Results, William Davidson Institute Working
Paper Number 952
Siregar, R. & Pontines, V. (2005). External Debt and Exchange Rat Overshooting: The case
of selected East Asian Countries. The University of Adeleide, Australia School of
Economics. Working Paper.
Siregar, R., & Rajan, R.S. (2004), Impact of Exchange Rate Volatility on Indonesias Trade
Performance in the 1990s, The Japanese and International Economies, 18, pp. 218240.

97

Solnik, B, (2000) International Investments, 4th edition, Addison-Wesley Copyright Addison


Wesley Longman
Sullivan, A. & Steven, M.S. (2003). Economics: Principles in Action. Upper Saddle River,
New Jersey, Pearson Prentice Hall. pp. 340.
Wambua, J. (2006) The Casual Relationship between Interest Rates & Foreign Exchange
Rates in Kenya, Unpublished MBA Project, University of Nairobi

98

You might also like