The Effect of oil prices on the USD KES exchange rate in Kenya, 2000-2017
Date
2018
Authors
Njuguna, Irene Wairimu
Journal Title
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Publisher
Strathmore University
Abstract
This study sought to investigate the effect of oil prices on the USDKES exchange rate in Kenya over the study period 2000-2017. The study uses Brent crude oil as the benchmark for oil prices and the USDKES currency as the exchange rate. Secondary data was obtained from the Central Bank of Kenya and the United States Energy Information Administration. The study employed Unit Root Tests, Engle-Granger and Johansen tests for cointegration, Granger Causality test, and Vector Autoregressive Models (VAR) models used to assess for linear dependencies between the variables. The study objectives were to examine the short-run and long-run comovement of oil prices and the exchange rate. Using cointegration tests, the study found that there was no counteraction between the oil price and the USDKES exchange rate implying that there is no long-run cointegrating relationship between the oil price and the exchange rate. Granger causality tests found no causality between oil price and the exchange rate. V AR tests indicated that oil price accounts for a marginal proportion of exchange rate movements. The study thus finds that whereas theoretical and empirical literature has provided evidence for a long-run relationship between oil price and the exchange rate, the same is not the case for Kenya. These findings have important implications for policymakers, business entities, and financial market players who may typically infer that oil price has an effect on the exchange rate. For policymakers such as the Central Bank, price stability actions will be less reactive oil price movements; Business entities and Financial market players would adjust their forecasting models in line with the findings.
Description
Dissertation submitted to Strathmore Business School in partial fulfillment of the requirements for the degree in Masters in Business Administration