Exchange Rate Shocks

1.0 OVERVIEW OF SUMMARY (INCLUDES; BACKGROUND OF THE STUDY, OBJECTIVES, PROBLEM STATEMENTS)

The impact of exchange rate shocks on household costs and expansion is typically condensed as far as a marvel called swapping scale go through, which is the impact that a changeless swapping scale stun of a given extent has on costs and swelling after some time. Present day conversion scale models accentuate monetary resource markets. An expansion in interest rate is important to settle the conversion standard devaluation and to check the inflationary weight and along these lines maintains a strategic distance from numerous unfriendly financial outcomes. A low inflation rate situation will show a rising cash rate, as the obtaining energy of the money

The exchange rate of the cash in which a portfolio holds the greater part of its speculations discovers that portfolio's genuine return. The objective of this research is to set up the impact of interest rate and inflation rate on exchange rates in Kenya. The shilling touched a memorable 107 units low against the dollar in late 2011. The impact was an expansion in the cost of obtaining, which backed off take-up of credit and moderated monetary development in 2012. The shilling quality was sapped by a transaction of elements and market essentials, for example, declining sends out receipts. Loan costs, expansion rates and trade rates are on the whole exceedingly associated. By controlling financing costs, national banks apply impact over both interest rate and inflation rates, and changing loan costs affect expansion and money esteems.

2.0 EMPIRICAL FINDINGS

Kenya's involvement with the money related change process demonstrates a broadening loan fee spread after financing cost advancement. Regardless of the significance of money related and conversion scale

There is an exceptionally solid connection between loan fees, expansion and trade rates in the economy. The level at which loan fees and swelling influenced the trade rates. This inferred, a high level of changes in the trade rates is influenced by the expansion or trade rates in the nation. The loan costs had a solid positive relationship with KES/USD forex rates and the swelling rates had a little negative connection with a similar autonomous variable.

5.0 LIMITATION

DATA:

The data used was KES/USD Annualized Average Exchange Rates (Forex), Annualized Average CBK Interest Rates (in %) and Annual Average Economic Inflation Rates (in %) to determine the effects of interest rate and inflation rate on exchange rates in Kenya. Secondary data was collected from Central Bank and Kenya National Bureau of Statistics, data was used: Interest rates, Inflation Rates and Exchange rates for years 2007-2012.

METHOD: The study used Test of goodness of fit and the explanatory power of the model R2, F test ANOVA and also test of Multicollinearity.

VARIABLES:

Dependent variable: Exchange Rates

Independent variable: Interest Rates : Inflation