BBSE Research Projects (2018)

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An Analysis of regional integration in a developing economy.
(Strathmore University, 2018) Oketch, Bruce Otieno
The purpose of this study is to find the effect of regional integration in the Kenyan economy with a particular emphasis of dete1mining whether the regional integration has resulted to trade creation or trade diversion. The study adopts an augmented gravity model to determine the effects of the regional integration and the resulting effects either being trade creation or trade diversion. Time series data was used for the period 1980-2015. Using a panel data analysis the results show that there was some trade creation within EAC and COMESA.
An Analysis of the quantitative impact of climate change on national level economic growth: a Kenyan case study
(Strathmore University, 2018) Mbotela, Immanuel Malombe
The issue of climate change has been a growing interest in recent times for a number of reasons. Chief among them is because the economic landscape of most if not all African countries is dependent on the dynamics of climate change. Key sectors of the economy such as agriculture, forestry, energy, coastal and water resources are highly susceptible to climate change. That being the case, this paper seeks to analyze the empirical linkage between economic growth and climate change in Kenya from a quantitative point of view. Using data from two climate variables, temperature and precipitation, and employing time series analysis techniques, the paper tries to estimate both the short-run and long-run effects of climate change on growth. The paper establishes that an increase in temperature significantly reduces economic performance in Kenya. This takes the form of reducing agricultural output, industrial output, and aggregate investment, and increasing political instability. Some policy options have arisen from this study all in all. First and most importantly, mainstreaming climate change adaptation into National Development Strategy and budgets could promote proactive engagement on the formulation and implementation of climate change adaptation strategy. Second, the potential of regional or multiple countries approach to climate change adaptation is high due to possibility of economies of scale.
Determinants of adoption of agricultural technology in Kenya: a case of small scale farmers in Kirinyaga
(Strathmore University, 2018) Chweya, Valentine Muhonja
Agricultural technologies are seen as an important route out of poverty in most of the developing countries. However the rate of adoption of these technologies has remained low in most of these countries. This study aim at shedding some light on the potential factors that influence agricultural technology adoption in Kenya by looking at small-scale farmers in Kirinyaga. Kenya. The following study objective guided the study, to identify determinants of adoption of technology in a among small scale farmers in Kirinyaga. A Iogit and probit model is used to analyze the determinants of technology adoption, using a secondary survey data of 4363 observation. The following were the findings, education level, age, farm size, level of income, belonging to a group and access to credit influence the decision of adoption. Given these results, the paper recommends tailored credit schemes for farmers, dissemination of information via groups, improvement of links between manufacturer of the modem technology and the farmers and subsidizing of the modem agricultural technology
Devolved monetary policy
(Strathmore University, 2018) Ndung'u, Bryan Wandegwa
Inflation is the sustained increase in the prices of goods and services. Inflation is a double-edged sword, such that too much or too little will affect the economy poorly. Various Governments employ their Central banks or Federal reserves to try and regulate inflation. The Central banks and Federal reserves have various tools in their fight to restrain inflation to a level they feel is optimal for their country. These are referred to as monetary policies, they include, but are not limited to: interest rates and open market operations. In this changing world, with all the advances in technology and such, monetary policy must be flexible and adjust quickly to several scenarios that could prove critical to a nation's economy. Tinbergen's (1952) Rule that the number of achievable policy goals cannot exceed the number of policy instruments dictates that a mechanical monetary policy rule can fail to achieve its stated objectives of full employment and target inflation. The 2007 financial crisis that brought about increased inflation globally and small instances such as the effect of the election period in Kenya had on the economy; these are some of the examples that call upon flexible monetary policy.
Dynamics of inflation and its effects on the Kenyan economy
(Strathmore University, 2018) Ndung'u, Simon Gathi
The study on the relationship between economic growth and inflation has attracted attention from both researchers and policy makers. A high and sustained economic growth with low and stable inflation is the central objective of most policy makers. The main purpose of this study is to ascertain the nature of the relationship between inflation and economic growth in Kenya. One of the most important objectives for any countries is to sustain high economic growth. Even though there are main factors that affect economic growth, the concern of this paper is only about inflation. The relationship between economic growth and inflation is debatable. The first objective of this study is to investigate the relationship between inflation and economic growth. To analyze the data the model is formed by taking economic growth as dependent variable and four variables (i.e. inflation, investment, population and initial GDP) as independent variables. The result indicates that there is a negative relationship between economic growth and inflation.
Effect of exchange rate volatility on foreign direct investment in East Africa
(Strathmore University, 2018) Kamau, Michelle Wangui
The aim of this study was to dete1mine the impact of exchange rate volatility on Foreign Direct Investment (FDI) inflows into the East African region. The countries studied include Kenya, Uganda, Tanzania and Rwanda. The study period was 2001-2016. The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model was used to obtain the exchange rate volatility while the Vector Error Connection Model (VECM) was used to study the relationship between exchange rate volatility and FDI. The results reveal that in the short-run, exchange rate volatility and FDI have a negative significant relationship. However, in the long-run, the relationship is positive but insignificant. Other factors such as infrastructure are found to have a positive relationship with FDI both in the short-run and in the long-run. However, the relationship is only significant in the long run. Trade-openness is found to have a negative and significant relationship with FDI. Political stability, Interest rates and GDP exhibit an insignificant relationship with FDI. The main policy recommendation from this research is that the governments of East African countries should aim to maintain low exchange rate volatility in the short-run. It is also important for policy makers to coordinate the policies promoting trade openness and those promoting competitiveness of local products so as to attract FDI.
Effects of electronic money on velocity of money in Kenya
(Strathmore University, 2018) Myall, Adrian Henry
The purpose of this study is to determine the effect that electronic money has on the velocity of money in Kenya as well as its determinants. The study uses income, exchange rates, expected inflation, interest rates and financial innovation as the determinants of velocity in the model. Monthly time series data from the period 2009-2016 is used and autoregressive distributed lag (ARDL) model is implemented with six measures of velocity of money as the dependent variable. The measures include velocity of; narrow money (Ml), narrow money less electronic money (Ml-EM), broad money (M3), broad money less electronic money (M3-EM), electronic money (EM) and quasi-money (M2). Exchange rate and the number of bank branches were significant in determining all the velocity measures in the long run, with a positive and negative relationship respectively. The presence of electronic money was found to reduce the positive relationship of velocity with exchange rate while the relationship of velocity with the number of bank branches became more positive. This means that increased use of electronic money may help to curb the effects of exchange rate fluctuations while at the same time it increases the velocity of money as more people get access to financial services. The study concludes that the issuance of electronic money should be controlled and closely monitored so as to avoid adverse effects to the monetary system and economy.
Effects of mobile money transactions on private savings ratio in Kenya from 2007 to 2017
(Strathmore University, 2018) Kagondu, Yvonne Wanjiru
Mobile money has received a lot of attention since the successful introduction of Mpesa in Kenya in 2007. Many economies in Africa have adopted the technology and it has evidently altered the lives and behaviors of those who use it and subsequently, respective economies. This has been attributed to the ease of access of financial services through the technology. Private savings, one of the variables that the innovation has directly and indirectly affected, is a key financial and economic aspect for micro and macroeconomic stabilization in developing countries. Despite this, recent findings have shown that savings in Kenya have perpetually been on the decline as compared to other regions. Most studies have approached the topic of mobile money and savings on a financial inclusion to the previously unbanked basis but have failed to take account of post-adoption saving responses of users of the technology, which this study aims to consider in a macroeconomic perspective. This study uses co-integration analysis to identify the long run relationship between mobile money transactions and private savings relative to GDP in Kenya from 2007 to 2017. The findings of this study are presence of a long run relationship but the nature of the relationship being inconclusive. This implies that the technology may have affected private savings ratio positively due to the increased financial inclusion but may have also had a negative effect due to the increase of fast access of financial services due to the technology.
Effects of oil price volatility on the Kenyan stock exchange
(Strathmore University, 2018) Leiyagu, Donna Naishonva
This study seeks to examine the relationship between the international oil market performance and the performance of stocks in the Kenyan stock market. The study, therefore, employs a bivariate GARCH-BEKK (l, l) model to study this relationship and the choice of this model is driven by the fact that the model ensures positive definiteness, which makes it more effective in analysis of volatility and shock spillover. The findings of this study indicate that there exists unidirectional volatility spillover from the international oil market to the Kenyan stock market returns. The conditional variance of the Kenyan stock market returns is also seen to be affected by past volatility in the stock market.
An Empirical analysis of inclusive growth in Kenya measurement, determinants and policy recommendations
(Strathmore University, 2018) Wakhu, Ronald Brian
This study examines inclusive growth in Kenya. The call for inclusive growth has been broadcasted the world over by policy makers. However, there seems to be very little understanding and very small steps towards the achievement of significant inclusive growth. A unified measure of Inclusive growth is estimated by integrating economic growth performance (to capture growth) and income distribution properties (to capture equity).This allows us to capture inequality as well as economic growth. The unified measure is then regressed against a set of variables that are used in growth and inequality analysis in order to identify the determinants of inclusive growth. Results indicate that inclusive growth in Kenya from 1978-2005 had large shocks in the 1990s, but largely remained non-inclusive before 1992 and inclusive briefly after 2002 till 2005.0f the variables used in analyzing the determinants of inclusive growth, only trade openness and financial deepening are found to be statistically significant, positively and negatively respectively.
Empirical evaluation of the relationship between Bitcoin and domestic currencies in Africa
(Strathmore University, 2018) Kalu, Elizabeth M'meneni
Bitcoin trading has gained momentum in the African continent as well as in the world. As is so, it is crucial to understand how the development of bitcoins would affect a given economy, especially because the operation of bitcoins is beyond the governing eye of any Central Bank. This research seeks to study Bitcoin as a currency and establish what impact it would have on the domestic currencies of nations which have significant Bitcoin trading activity in Africa. This impact will be evaluated using the Random Effects method of estimation. The research will further evaluate the long-term relationship, if any, between bitcoins and selected domestic currencies in Africa using the Kao and Perdoni residual Co-integration tests. The countries of focus in this research include Kenya, Morocco, Nigeria and South Africa, which were observed between 2014 and 2017. The choice of these countries and the duration of observation is due to the ease of availability of data on Bitcoin trading. Results confirmed the existence of a statistically significant relationship between the amount of bitcoins in circulation and macroeconomic variables such as exchange, interest and inflation rates. No long-term relationship was established and the Vector Autoregressive test was performed to capture the linear interdependencies among the variables. The conclusion drawn from this study is that as the number of bitcoins increases in a given economy, the domestic currency suffers devaluation. Due to this, governments are recommended to keep a watchful eye over bitcoin transactions in their respective economies as well as looking into the development of competitive central backed cryptocurrencies over which they would have total control.
Estimating value-at-risk using crash-metrics
(Strathmore University, 2018) Otao, Calvin Mochoge
The purpose of this study is to estimate Value-at-Risk using Crash-Metrics, a methodology proposed by (Wilmott, 2006) while applying them in the Kenyan context. We compare the results from the Beta Parametric Value-at-Risk, a methodology for estimating Value-at-Risk, proposed by (Sharpe, 1964). Crash-Metrics should according to (Wilmott, 2006), produce a higher loss scenario than Value-at-Risk. The dataset used includes daily returns of listed banks' stock and Nairobi All Share Index for the period beginning 2nd January 2015 to 31st December 2017. The results show that Crash-Metrics indeed outperforms Value-at-Risk during periods of markets stress by providing higher value for portfolio loss than the Beta Parametric Value-at-Risk.
The Fiscal implications of introducing a non-contributory social pension system in Kenya
(Strathmore University, 2018) Bwire, Lilian Adongo
Many countries in Sub Sahara Africa are facing an imminent long term problem: inability to provide old age security to their citizens. The danger is almost certain for many of these countries as they all present the tale-tell signs; presence of a large informal sector that is not adequately covered by a default social security system, high rates of unemployment, rapidly growing aging population and inefficient social security systems. These are all red flags and unless countries in Sub Sahara Africa make rapid and sustainable reforms in their pension systems, they are all likely to face chronic poverty among the elderly. As it stands, pension coverage is already very low, access to health care and other essential services is difficult and many households are headed by an elderly person. This only serves to increase vulnerability among the elderly as they are more likely to become impoverished. After decades of pursuing a contribution based system, coverage and adequacy still remains low and insufficient. This is why researchers are advocating for a more direct approach that will cater for all the elderly, with or without a previous history of contribution. Many countries are now trying to explore the possibility of introducing direct cash transfers to the elderly, also known as universal social pensions. This paper looks at the benefits of introducing a non-contributory social pension system in Kenya and particularly focusses on the fiscal resources required to fund the program and sustain it for long term use. The data collected from previous research conducted in other developing countries that have introduced this universal social pension provided great insight on the problems that are likely to arise and the difficulties faced by policy makers in trying to implement such a program. This report's main findings are really just a discussion of how much the Kenyan government will be forced to allocate, in terms of fiscal resources, to the program and at what cost (fiscal trade-off). It also provides some suggestions for the Kenyan government in case the program were to be fully implemented. As of 2017, a pilot cash transfer program was already underway
Impact of exchange rate volatility on inflation rates in Kenya: GARCH model approach
(Strathmore University, 2018) Maina, Nathaniel Mugambi
The purpose of this research is to find out the effect of exchange rate volatility on inflation rates in Kenya. The methodology involves the use of generalized autoregressive conditional heteroskedastic (GARCH) approach in modeling exchange rate volatility in Kenya and finding the effect it has on the inflation rate. The research applies both asymmetric and symmetric models that capture most common stylized facts about exchange rate returns such as volatility clustering and leverage effect. The period of focus is between 2005 and 2015 and the empirical results show that there is volatility clustering and that exchange rates have an impact on inflation rates. The study is valuable to the central bank of Kenya, research institutes, commercial banks and investment firms.
The Impact of globalization on foreign direct investment in Kenya and South Africa
(Strathmore University, 2018) Gachui, Rachael Njoki
Given that emerging economies in Africa are becoming increasingly integrated into the global economy, it is foreseeable that shocks that occur within these developed economies could have an impact on their investment and other macroeconomic fundamentals. Using panel data, the study assesses Foreign Direct Investment (FDI) in Kenya and South Africa for the period between 1970 and 2014 to show that the level of globalization (as measured by the KOF Index of Globalization) of the United Kingdom, France and Germany do influence the level of FDI in Kenya and South Africa. Market size, trade openness, inflation rate and exchange rate risk are used as control variables in the study. The Random Effects model was utilized to estimate the parameters in the model and as a result, it was found that the level of globalization in the United Kingdom and in Germany do have an impact on FDI inflows into Kenya and South Africa. The level of globalization in France is, however, found to not be a statistically significant determinant of FDI in these two markets. The level of inflation was also found to be statistically insignificant in explaining the level of FDI in Kenya for the time span under analysis
Impact of government expenditure on gross domestic product in east Africa
(Strathmore University, 2018) Kamau, Ken King'au
It is important for a country to determine how much government expenditure that should be spent on different sectors of the economy so as to promote economic growth. The study aimed at developing a model that will explain the relationship between government expenditure and GDP in East Africa, i.e. Kenya, Uganda and Tanzania. The study proposed to use nonexperimental research design with data from 1990-2015 and the data was obtained from various sources: World Bank Open Data, IMF data bank. The study focused on four key sectors of the economy: health, infrastructure, education and defense and aimed to conclude on the relationship between government expenditure in these various sectors and GDP, i.e. whether it is positive or negative. The Granger Causality test determines the casual relationship between GDP growth and government expenditure components (Ender, 1995). The study findings indicated that; both Military and health expenditure have a positive significance to economic growth whereas infrastructure and education expenditure have a negative effect on economic growth in East Africa. The governments should emphasize to increase expenditure to military and health so as to influence GDP positively thereby promoting economic growth.
The impact of oil price shocks on inflation
(Strathmore University, 2018) Kiilu, Nicole Nduku
The issue that this study addresses is the lack of stability of consumer prices in Kenya. According to the National Energy and Petroleum Policy Report (2015), the fluctuating international prices of petroleum products and the volatile foreign exchange rates have led to unpredictable consumer prices within the country. The resulting cost-push inflation has led to an unsustainable increase in the cost of living from 2010. The purpose of this study is to investigate the impact of international oil price changes on inflation in Kenya. This will be done using a Vector Autoregressive Model and the model will control for exchange rates and interest rates. The study uses monthly data from 2000 to 2016. The variables examined are: domestic price levels, Murban crude oil prices, the Kenyan to US dollar exchange rates and the 91 day Treasury bill interest rates. The results indicate a positive correlation effect of oil price on inflation but no long run co-integrating relationship between these variables. The results also indicate the absence of an asymmetrical relationship between oil prices and inflation in Kenya. Lastly the results found that oil price had a uni-directional effect on domestic prices. Oil price also Granger-caused domestic prices indirectly through the exchange rate; that is, as oil price increases, this increases import prices and hence domestic prices. These results are useful in determining which relevant measures can be put in place by policymakers to address the problem of inflation and also add to the body of knowledge that seeks to understand the intuitive connection between oil price fluctuations and inflation rate.
Impact of political conflict on international trade: a case of electoral violence in Kenya
(Strathmore University, 2018) Munyui, Edwin Munjogu
Political conflict has been a major setback for developing economies over the years and the effect on the economy cannot be ignored. International trade which is significant in development is not spared when internal conflict arises. Using a gravity model this paper will focus on the impact of political conflict on International trade in Kenya. The study will use panel data from Kenya and 5 of its main trading partners to measure this relationship empirically. The paper will pay attention to political cycles in Kenya and the variable of interest will be conflict. The value of trade with a trading partner will be the dependent variable in this relationship. Using data from 1992 to 2015 on the GDP, distance between Kenya and a trading partner, a conflict dummy variable and other controls in the gravity model, I will investigate the impact of political conflict on International trade.
Impact of private sector credit on economic growth in the East African Community
(Strathmore University, 2018) Okoth, Mercy Anyango
The levels of credit extended to the private sector by banks is considered as an important factor when measuring the extent of financial development of a country. Credit extended to the private sector by banks is considered more efficient approach to support the development of economies compared to extension of credit to the public sector. In countries where the government through the public sector dominates in terms of receipt of credit, the private sector experiences challenges funding its investments though credit. In this study, vector error correction model has been applied, on annual panel data from 1988 to 2015 to investigate the relationship between credit extended to the private sector by commercial banks and economic growth in the EAC member states. This study focused only on Kenya, Uganda and Tanzania due to data availability. Other control variables used were; government expenditure, inflation and interest rates. The results show that bank credit to the private sector has a positive impact on the economic growth in the EAC in the long run. Interest rates, inflation and government expenditure also have a significant impact of the gross domestic product of Kenya, Uganda and Tanzania. The EAC member countries have implemented reforms aiming to achieve macroeconomic convergence before the on-coming East African Monetary Union, thus the expected empirical results show that policy makers in the EAC should focus on long run policies to promote economic growth such as innovations in the banking and financial markets in order to increase the private sector credit and maximize on the benefits of regional integration.
Impact of public debt on economic growth: case study - Kenya
(Strathmore University, 2018) Karoney, Carol Noelle Jerotich
There is an urgent need for policymakers in governments, central banks, and international policy organizations to understand the effects of public debt on economic growth extensively. The government should further understand the appropriate mix of domestic and external debt as well as be informed of the level to which they can borrow without negatively affecting economic growth both directly and indirectly. Secondly, the fear of investors interpreting high public debt-to-GOP ratios as the result of time inconsistencies or inflationary policies should lead governments to implement immediate and severe austerity measures on and adopt fiscal measures as well as alterative to ensure public debt sustainability. Additionally, high burden in debt servicing affects investments as it potentially crowds out private investments Lastly, studying a specific country enables the study considers country specific fundamentals hence more conclusive results as compared to regional analysis. Similarly, the study aims to fill the gap of limited literature on the impact of domestic debt on economic growth while concurrently examining external debt. Finally, using a wider range of data will enable the study build on existing literature.

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