Exchange rate volatility and its effect on intra-East Africa Community regional trade
| Autor | Thomas Mosbei/Silas Kiprono Samoei/Clement Cheruiyot Tison/Edwin Kipyego Kipchoge |
| Cargo | Moi University/Moi University/Moi University/University of Eldoret |
| Páginas | 43-53 |
Latin American Journal of Trade Policy 9 (2021) – ISSN 079-9668 – Universidad de Chile
43
Exchange rate volatility and its effect on intra-East Africa
Community regional trade1
Thomas Mosbei*
Silas Kiprono Samoei**
Clement Cheruiyot Tison***
Edwin Kipyego Kipchoge****
Abstract
East Africa Community (EAC) exchange rate volatility spiraled up when the countries adopted the
Structural Adjustment Policies in early 1980s. The question that remains unanswered is whether
exchange rate volatility hinders or promotes trade. The o bjective of this study was to determine the
effect of exchange rate volatility and its effect on Intra-East Africa Community regional trade. Unit
root tests results indicated that some of the variables were stationary, and on first difference all
variables were I(1). Differenced panel data was fitted into a General Autoregressive Conditional
Heteroscedasticity model to measure volatility. Hausman test showed that the fixed effect model was
appropriate, exchange rate, money supply, population, and foreign direct investment si gnificantly
determines intra-East Africa Community regional trade. It was concluded that exchange rate volatility
is observable in the Intra-East Africa region and further, exchange rate, money supply, population,
and foreign direct investment significantly influenced intra-EAC regional trade. It is recommended
that EAC member states should formulate policies that ensures exchange rate stability in the region
to reduce unpredictability of exchange rate. Policies should be enacted to guarantee adequate money
supply and encourage foreign direct investments.
Keywords: East African Community, GARCH, Unit root and Exchange rate Volatility.
Resumen
La volatilidad de los tipos de cambio en la Comunidad de África Oriental se disparó cuando los países
adoptaron las Políticas de Ajuste Estructural a principios de la década de 1980. La pregunta que
permanece sin respuesta es si la volatilidad del tipo de cambio obstaculiza o promueve el comercio.
El objetivo de este estudio fue determinar el efecto de la volatilidad del tipo de cambio y su efecto en
el comercio intra-regional de la Comunidad de África Oriental. Los resultados de las pruebas de raíz
unitaria indicaron que algunas de las variables eran estacionarias, y en primera diferencia, todas las
variables eran I(1). Por esto, los datos de panel diferenciados se ajustaron a un modelo general de
heterocedasticidad condicional auto-regresivo para medir la volatilidad. La prueba de Hausman
mostró que el modelo de efectos fijos era apropiado, y que el tipo de cambio, la oferta monetaria, la
población y la inversión extranjera directa determinan significativamente el comercio intra-regional
de la Comunidad de África Oriental. Se concluyó que la volatilidad del tipo de cambio es observable
en la región de África Oriental y, además, el tipo de cambio, la oferta monetaria, la población y la
inversión extranjera directa influyeron significativamente en el comercio intra-regional. Se
recomienda que los Estados miembros de la Comunidad de África Oriental formulen políticas que
aseguren la estabilidad del tipo de cambio en la región para reducir la imprevisibilidad del tipo de
cambio. Deben promulgarse políticas para garantizar una oferta monetaria adecuada y fomentar las
inversiones extranjeras directas.
Palabras Claves: Comunidad de África Oriental, GARCH, Raíz unitaria, volatilidad del tipo de
cambio.
1 This article is a revised and expanded version of a thesis entitled ‘Exchange rate volatility and its effect on intra-East Africa
Community regional trade’ presented at Moi University, Eldoret, Kenya for award of masters degree in Agricultural
Economic and Resource Management.
* Department of Agricultural Economics, Moi University. Email address: mosbeithomas@gmail.com. Received: October
1st, 2020; modifications: April 10th, 2021; accepted: April 24th, 2021.
** Department of Agricultural Economics, Moi University.
*** Department of Economics, Moi University.
**** Department of Mathematics and Computer Science, University of Eldoret.
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