Question

Write a term paper on ,e= f(change in inflation +change in interest rates +change in income)

Where e= Exchange rate.(between kenya and another country)

1.Introduction

2.Literature Review

3.Data Analysis

4. References

Answer 1

The exchange rate is defined as the price of one currency expressed in terms of another currency. The exchange rate has two componenets and that are domestic currency and the foreign currency. The price of unit of a foreign currency expressed in terms of domestic currency, this is the first component. In the second component the price of a unit of domestic currency is expressed in foreign currency. There are two types of exchange rates and they are flexible exchange rates and fixed exchange rates. In a flexible exchange rate system, the exchange rate is determined by the supply and demand for the foreign exchange. The exchange rates depend supon a lot of factors and the most important three is the Central bank's interest rate, country's debt and the strength of the economy.

In a fixed exchange rate system the country does not vary the exchange rate according to the supply and demand for the foreign exchange. In this system the countries peggs their exchange rate to a targeted value. The country China maintains a fixed exchange rate system. There are lot of factors affecting the exchange rate of a country and they are inflation, changes in interest rate, public debt , current account deficts, terms of trade and political stability. A general conditrion is that a country with a lower inflation rate exhibits a rising currency value, that is appreciation. The countries with a higher inflation rate typically see a depreciation in their currencies. The interest rate, infaltion and the exchange rate are highly correlated. By changing the interest rates, centarl banks exert influence over both infaltion and exchange rates, and changing interest rate impact infaltion and currency values. The higher interest rate attaract the foreign capiatal and cause the exchange rate to rise. If there is a decreasing interest rates, that tend to decrease the exchange rates.

Literature review:

In the work of ' Determination of exchange rate movements' by Granham Hacche, he describes about the various factors determining the exchange rate according to him, when the price movements are accomodated by monetary policy, inflation in one economy in relation to the rest of the world may be expected to cause a compensating depereciation. He also says that there are two ways in which exchange rates may be affected by realtive price developments in domestic and foreign economies. An autonomous increase in the domestic costs and prices which is not accomodated by monetary policy may cause to appreciate the exchange rates.

Another study was done by Anita Mirchandi on the Exchange rate volataility in the Indian foreign exchange market, according to her there is a strong correlation between the interest rate and the exchange rate. The statistical analysis shows that a negative co-relation between the exchange rate and the interest rate. And she also showed that there is a moderate relationship between exchange rate and the inflation. The relationship between the exchange rate and the GDP is positive and moderate.

Data Analysis:

Performance of the securities market by largely reflect the economic situation of a country. This situation is explained with the chnages in the exchange rate market. The large under valuations hurt the growth and the small to moderate enhanved the growth of the country.

The above graph shows the existing trend for the U.S dollar fluctuations in keneya. There was a seies of exchange rate peaks and they are at the  7th, 26th, 39th and 55th months. There were also troughs in it and they are at the  4th, 24th, 29th and 47th months. As a result the U.S dollar exchange rate decreased at a steady rate. Then it has increased in the 26 _th month and again dropped in the 29_th month. From the 29_th month the U.S dollar has increased drastically. The exchange rate once again rose between the 47th month and 55th month to stand at approximately Ksh 81. (The above graph represents the exchange rate flcututions for five years).

References:

1.https://www.thebalance.com/what-are-exchange-rates-3306083

2. Hacche, G. (1983), “The Determinants of Exchange Rate
Movements”, OECD Economics Department Working Papers,
No. 7, OECD Publishing, Paris.

3.International Journal of Economics and Financial Issues
Vol. 3, No. 1, 2013, pp.172-179
ISSN: 2146-4138
www.econjournals.com

4.EXISTING TRENDS IN FOREIGN EXCHANGE
RATES OF KENYA’S MAIN TRADING
CURRENCIES
Ouma Johnmark Obura, MBA
Prof. M. S. Mukras, PhD
Dr. David Oima, PhD
Maseno University, Kenya