Exchange Rates and Economic Growth in Kenya: An Econometric Analysis.

The current paper expands on an earlier DDP (No.607), which had discussed the relationship between economic growth and exchange rate in Kenya. Based on data for the period 1970 to 1996, we analyze the possible direct and indirect relationship between the real and nominal exchange rates and GDP growth. We derive these relationships in three ways: within the context of a fully specified (but small) macroeconomic model, as a single-equation instrumental variable estimation, and as a vector-autoregression model. The estimation results from the three different settings show that there is no evidence of a strong direct relationship between changes in the exchange rate and GDP growth.