The Relationship between Exports and Inflation in Kenya: An Aggregated Econometric Analysis

Abstract

The relationship between exports and inflation remain debatable and inconclusive where empirical studies have posted mixed results such as [11,16,12,13,15] that range from positive effect, negative or no effect with inadequacies in the analytical techniques where the studies either failed to conduct causality tests, variance decomposition or impulse response analysis. This implied lack of consensus on the effect of total exports on inflation, lack of knowledge on either the direction of causality and how a one standard deviation shock on total export influences inflation. Thus, the studies inconclusively and incomprehensively analyzed the relationship between inflation and exports. Thus, this study determined the relationship between total exports and inflation in Kenya by employing vector autoregressive (VAR) analysis techniques of Johansen cointegration, error correction, variance decomposition, impulse response and Granger causality analysis to bridge the gap of inconclusiveness in the analysis of the relationship between exports and inflation.