ABSTRACT

This study sought to establish the effects of RER volatility on Kenya’s international trade over the period 1993-2007 using the cointegration analysis technique. The results suggested that there exists one cointegrating vector for both Kenya’s real exports and imports and their respective fundamentals. The conclusion drawn by the study is that Kenya’s export and import demand are determined more by the exchange rate volatility than by changes in relative prices and other control variables. These findings have two policy implications. First, policy makers should focus more efforts on export diversification. Second, the government should implement a stable exchange rate policy.