The effect of changes in monetary policy and balance of payment on exchange rates in Kenya

Abstract

Exchange rate, monetary policies and balance of payments are key tools in economic management and in the stabilization and adjustment process in Kenya. In empirical and theoretical finance and microeconomics, there has been a looming question of how changes in the monetary policy and the balance of payment policies in a country affect its currency‘s external value. The objective of the study was to examine the effect of changes in monetary policy and balance of payment on exchange rate in Kenya. The research method that was adopted in this research was the quantitative method. Secondary data was used in this study. Data on changes in monetary policy (CBK and commercial banks regulation rate (%)) was obtained from the Central Bank of Kenya on quarterly basis for the period January 2005 to December 2014. The data collected was analyzed using Multiple Regression Analysis Model with the help of the SPSS software. The study findings indicated that external debt, interest rate, monetary policy, balance of payment and inflation rate are statistically significant to exchange rate as indicated by the positive and strong Pearson correlation coefficients. Based on the research findings, the study recommends that balance of payments and monetary policies should be controlled appropriately by the policy makers so as to maintain exchange rate at a harmless point to the overall economy. The study further recommends that other determinants of exchange rate such as inflation and interest rate as significantly indicated in the study should be regularly checked and corrected to avoid a paradigm shift in the exchange rate which may negatively impact the economy. The government should also set up monetary policies on exchange rates so as to keep it friendly to the overall economy