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Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach

Author

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  • Kiptui, Moses C.
  • Ndirangu, Lydia

Abstract

This paper examines the real exchange rate misalignment in Kenya using quarterly data over the period 2000 – 2014. The Behavioral Equilibrium Exchange Rate (BEER) approach to determine the extent of exchange rate misalignment is adopted. A vector error correction model (VECM) is estimated and the results show that the real exchange rate is largely driven by fundamentals. Thus, the equilibrium real exchange rate has been closely aligned to its long run equilibrium level, save for instances when misalignment occurred due to major economic shock such as the recent global financial crisis and the Euro zone economic crisis. Hence, given the managed float regime in Kenya, exchange rates keep adjusting to changing economic fundamentals.

Suggested Citation

  • Kiptui, Moses C. & Ndirangu, Lydia, 2015. "Determinants of Equilibrium Real Exchange Rate and its Misalignment in Kenya: A Behavioral Equilibrium Exchange Rate Approach," MPRA Paper 70542, University Library of Munich, Germany, revised 06 Apr 2016.
  • Handle: RePEc:pra:mprapa:70542
    as

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    File URL: https://mpra.ub.uni-muenchen.de/70542/3/MPRA_paper_70542.pdf
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    References listed on IDEAS

    as
    1. Keith B. Church, 1999. "Properties of the fundamental equilibrium exchange rate in the Treasury model," National Institute Economic Review, National Institute of Economic and Social Research, vol. 169(1), pages 96-104, July.
    2. Patrick Imam & Camelia Minoiu, 2011. "The Equilibrium Exchange Rate of Mauritius: Evidence from Two Structural Models," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(6), pages 134-147, November.
    3. repec:sae:niesru:v:141:y::i:1:p:62-70 is not listed on IDEAS
    4. Deniz Atasoy & Sweta C. Saxena, 2006. "Misaligned? Overvalued?. The Untold Story of the Turkish Lira," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 42(3), pages 29-45, May.
    5. Kristian Nilsson, 2004. "Do Fundamentals Explain the Behaviour of the Swedish Real Effective Exchange Rate?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 603-622, December.
    6. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    7. Edwards, Sebastian, 1989. "Exchange Rate Misalignment in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(1), pages 3-21, January.
    8. Frenkel Michael & Koske Isabell, 2012. "Are the Real Exchange Rates of the New EU Member Countries in Line with Fundamentals? – Implications of the NATREX Approach," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(2), pages 129-145, April.
    9. Michal Rubaszek, 2004. "A Model of Balance of Payments Equilibrium Exchange Rate," Eastern European Economics, Taylor & Francis Journals, vol. 42(3), pages 5-22, May.
    10. Keith B Church, 1992. "Properties of the Fundamental Equilibrium Exchange Rate in Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 141(1), pages 62-70, August.
    11. repec:sae:niesru:v:169:y::i:1:p:96-104 is not listed on IDEAS
    12. H. Levin, Jay, 1997. "Money Supply Growth and Exchange Rate Dynamics," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 344-358.
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    More about this item

    Keywords

    exchange rate; equilibrium; misalignment; Kenya;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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