THE EFFECT OF VOLATILITY ON TRADE IN THE EAST AFRICAN COMMUNITY COUNTRIES (1995 – 2015)
Journal Title: European Journal of Business and Social Sciences - Year 2017, Vol 6, Issue 6
Abstract
There has been a wide debate on the effect of exchange rate uncertainty on trade but the existing empirical literature does not suggest an unequivocally clear understanding or show consistency on the impact of changes in exchange rates on trade. Furthermore, majority of the previous studies used standard deviation which is the traditional measure of exchange rate volatility and has the limitation of assuming the empirical distribution of real effective exchange rate to be normal. In addition, it ignores the distinction between predictable and unpredictable elements in the exchange rate process. It is against this backdrop that this study aimed to analyze the effect of exchange rate uncertainty on the EAC countries trade for the period 1995-2015 using GARCH measure of exchange rate variability which measures exchange rate variability by positioning a structural relationship between volatility and its determinants. The specific objective of this study is to investigate the effect of exchange rate volatility on the EAC countries trade. This study used secondary data sourced from World Data Indicator, International Monetary Fund and Kenya National Bureau of Statistics. The study used historical design because it took into account the trend of the data and the prediction of the future was also made possible. The study employed the profit maximization model to develop the theoretical framework. The study tested for stationarity of data using the Im-Pesaran-Shin test for panel unit root test. Cross sectional dependence was tested using the Breusch Pagan Langrange multiplier test. The maximum likelihood random effect estimation was employed in the study which tested explicitly for non-normality of the exchange rate changes. The study found a significant negative relationship between exchange rate uncertainty and trade. The policy makers in EAC therefore should put in place policies on financial hedging which reduces the firms’ vulnerability to the risks arising from volatile currency movements. This will hence increase trade in the EAC countries resulting to a faster economic growth in the region.
Authors and Affiliations
HARRIET CHEPKOSGEI SUGUT| DEPARTMENT OF ECONOMICS, EGERTON UNIVERSITY, EGERTON, KENYA, DR. SYMON KIPROP| LECTURERS, DEPARTMENT OF ECONOMICS, EGERTON UNIVERSITY, EGERTON, KENYA, DR. AQUILLARS MUTUKU KALIO| LECTURERS, DEPARTMENT OF ECONOMICS, EGERTON UNIVERSITY, EGERTON, KENYA
Keywords
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