i
Call for Papers: Thematic Issue WCP

Exchange rate volatility and its effect on intra-East Africa Community regional trade

Authors

  • Thomas Mosbei Moi University
  • Silas Kiprono Samoei Moi University
  • Clement Cheruiyot Tison Moi University
  • Edwin Kipyego Kipchoge University of Eldoret

Abstract

East Africa Community exchange rate volatility spiraled up when the countries adopted the Structural Adjustment Policies in early 1980s. The question that remains unanswered is whether exchange rate volatility hinders or promotes trade. The objective of this study was to determine the effect of exchange rate volatility and its effect on Intra-East Africa community regional trade. Unit root tests results indicated that some of the variables were stationary at levels and on first difference, all variables were I(1). Differenced panel data was fitted into the General Autoregressive Conditional Heteroscedasticity model to measure volatility. Hausman test showed that the fixed effect model was appropriate exchange rate, money supply, population and foreign direct investment significantly determines intra-East Africa Community regional trade. It was concluded that exchange rate volatility is observable in the Intra-East Africa region and further, exchange rate, money supply, population, and foreign direct investment significantly influenced intra-EAC regional trade. It is recommended that EAC member states should formulate policies that ensures exchange rate stability in the region to reduce unpredictability of exchange rate. Policies should be enacted to guarantee adequate money supply and encourage foreign direct investments.

Author Biographies

Thomas Mosbei, Moi University

Department of Agricultural Economics, Moi University, Kenya.

Silas Kiprono Samoei, Moi University

Department of Agricultural Economics, Moi University, Kenya.

Clement Cheruiyot Tison, Moi University

Department of Economics, Moi University, Kenya.

Edwin Kipyego Kipchoge, University of Eldoret

Department of Mathematics and Computer Science, University of Eldoret, Kenya.

References

Albulescu, C. T., & Goyeau, D. (2016). The interaction between trade and FDI: the CEE countries experience. arXiv preprint arXiv:1609.02334.

Amadeo, K. (2012). Obamacare Bill: A Summary of the Bill’s 10 Titles. About. com.
Ambetsa, W. O, Kenneth P. Mdadila & Longinus K. Rutasitara (2019). The Determinants of Bilateral Trade in the East African Community: Application of the Gravity Model. International Journal of Economics and Finance; Vol. 11, No. 4; 2019

Baltagi, B. H. (2005). Econometric Analysis of Panel Data 3rd Edition England JW & Sons.

Choi, I. (2006). Combination unit root tests for cross-sectionally correlated panels. Econometric Theory and Practice: Frontiers of Analysis and Applied Research: Essays in Honor of Peter CB Phillips. Cambridge University Press, Chapt, 11, 311-333

Dell`Ariccia Giovanni (1999) “Exchange Rate Fluctuations and Trade Flows: Evidence from the European Union”. IMF Staff Papers 46(3): 315-334

De Grauwe, P. (1988). Exchange rate variability and the slowdown in growth of international trade. Staff Papers, 35(1), 63-84

De Grauwe, P. (1996). Monetary union and convergence economics. European Economic Review, 40(3-5), 1091-1101.

Eichengreen, B., & Gupta, P. (2013). The real exchange rate and export growth: are services different? The World Bank.

Gujarati, D. N., & Porter, D. C. (1999). Essentials of econometrics (Vol. 2). Singapore: Irwin/McGraw-Hill.

Heise, M. (2019). Inflation Targeting and Financial Stability: Monetary Policy Challenges for the Future. Springer.

Hina, M., & Ullah, A. (2019). The Role of Money Supply: Foreign Direct Investment & Economic Growth in Pakistan. International Journal of Economics, Commerce and Management, 7(2), 281-289.

Hooper, P., & Kohlhagen, S. W. (1978). The effect of exchange rate uncertainty on the prices and volume of international trade. Journal of international Economics, 8(4), 483-511.

Jadresic, E., Masson, P., & Mauro, P. (2001). Exchange rate regimes of developing countries: Global context and individual choices. Journal of the Japanese and International Economies, 15(1), 68-101.

Maddala, G. S., & Wu, S. (2001). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and statistics, 61(S1), 631-652.

McKoy, S. D. (2007). The Impact of Multilateral Trade Association Membership on Agricultural and Food Trade (Doctoral dissertation, North Dakota State University).

Mohsen, A. S., & Chua, S. Y. (2015). Effects of Trade Openness, Investment and Population on the Economic Growth: A Case Study of Syria. Hyperion Economic Journal, Year, 3(2), 3.

Musyoki, D., Pundo, M., & Pokhariyal, G. P. (2012). Real exchange rate volatility in Kenya. Journal of Emerging Trends in Economics and Management Sciences, 3(2), 117-122.

Mwangi, S. C., Mbatia, O., & Nzuma, J. M. (2014). Effects of Exchange Rate Volatility on French Beans Exports in Kenya.

Nuroglu, E. (2010). The Impact of Population on Bilateral Trade Flows in the Case of OIC. Working Paper, International University of Sarajevo.

Phillips, P. C., & Moon, H. R. (1999). Linear regression limit theory for non-stationary panel data. Econometrica, 67(5), 1057-1111.

Resnick, D. (2017). Democracy, decentralization, and district proliferation: The case of Ghana. Political Geography, 59, 47-60.

Senadza, B., & Diaba, D. D. (2017). Effect of exchange rate volatility on trade in Sub-Saharan Africa. Journal of African Trade, 4(1-2), 20-36.

Shapiro, I. (2009). The state of democratic theory. Princeton University Press

Sosvilla-Rivero, S. (1991). Asset-market models of exchange-rate determination: Basic models, empirical evidence and extensions.

Todani, K. R., & Munyama, T. V. (2005, November). Exchange rate volatility and exports in South Africa. In TIPS/DPRU Forum (Vol. 30).

UNCTAD (2006). East Africa Community Regional Integration: Trade and Gender implications.

UNCTAD (2018). East Africa Community Regional Integration: Trade and Gender implications.

World Bank. (2017). Atlas of Sustainable Development Goals 2017: From World Development Indicators. The World Bank.

Keywords:

East African Community, GARCH, Unit root, exchange rate volatility