Discussion Paper No. 108 of 2010 on Equilibrium Real Exchange Rates and Real Misalignment in Kenya: A Fundamental Equilibrium Approach
View/ Open
Publication Date
2010Author
Type
Discussion Paperviews
downloads
Metadata
Show full item recordBy
Oduor, Jacob & Khainga, Dickson
Abstract/ Overview
With the liberalization of exchange rate in most countries, policy makers have to contend with erratic movements in exchange rates in the short-run, causing exchange rate misalignments in the long run. Exchange rate misalignments have several adverse implications including distorting resource allocation between production sectors, distorting patterns of trade, and distorting debt repayment schedules for indebted countries, among others. When exchange rate movements become erratic, monetary authorities intervene in the exchange rate markets to correct any misalignments. Interventions are supposed to be based on some indicator that the observed exchange rates are either over-appreciated or over-depreciated, hence the need for an intervention. Without this knowledge, it is possible that wrong interventions may be carried out, interventions may be carried out when they are not necessary, or interventions may not be done at all when they are necessary. This study estimates the equilibrium exchange rate in Kenya using the fundamental equilibrium approach. The results show that there were three main episodes of misalignment; in late 2002 to early 2003, mid 2004, and mid 2005. In general, the study finds that real exchange rate misalignments are mean-reverting in the long run, and therefore should not warrant policy intervention.
Publisher
The Kenya Institute for Public Policy Research and Analysis (KIPPRA)Series
DP/108/2010;Collections
- Discussion Papers [314]
Related items
Showing items related by title, author, creator and subject.
-
Discussion Paper No. 110 of 2010 on General Equilibrium Real Exchange Rates in Three-Good Economy Setting
Oduor, Jacob (The Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2010)This study develops a theoretical general equilibrium model of the determination of the equilibrium long-run real exchange rates in a three-good open economy framework. Three economic agents are considered in the model: ... -
Discussion Paper No. 08 of 2001 on Specifying and Estimating Partial Equilibrium Models for Use in Macro Models: a Road Map for the KIPPRA-Treasury Macro Model
Geda, Alemayehu & Ndungú, Njuguna S. (The Kenya Institute for Public Policy Research and Analysis, 2001)Formulating research questions and carrying out empirical analysis is not an easy task. It is particularly difficult for practitioners in government ministries, who are bogged down with the day-to-day running of the ministry ... -
Discussion Paper No. 305 of 2023 on mpact of Trade Agreements on Welfare, Investment, Economic Growth, and Tax Revenue: A Computable General Equilibrium Application to Kenya
Mwatu, Shadrack; Karanja, John (The Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2023)This study examines the impact of tariff liberalization under trade agreements on welfare, investment, economic growth, and tax revenue using a Computable General Equilibrium (CGE) model anchored on the 2021 Social Accounting ...