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

Aim: This paper tries to identify the relationship between exports and inflation in Kenya: An aggregated econometric analysis.

Study Design: The analysis is based on the demand pull theory of inflation and on applied correlation research design using monthly time series data from Central Bank of Kenya for the 132 months between January 2005 and December 2015.

Methodology: Vector autoregressive analytical techniques of Johansen cointegration, vector error correction, variance decomposition, impulse response and Granger causality are employed in order to comprehensively analyze the relationship between inflation and exports in Kenya.

Results: The results indicate that inflation has a significant positive long run relationship with total exports. This is a conclusion supported by variance decomposition and impulse analysis with a coefficient of 1.39 at 5% level of significance, implying that a percentage increase in total exports increases long-run inflation in Kenya by 1.39%. In the short run, past values of total exports influence inflation negatively and there is a unidirectional causality from total exports to inflation.

Conclusion: Total exports are found to affect inflation in Kenya critically; it is recommended that the government adopts trade policies targeting a reduction in total exports as they are likely to lower the shortage of these products in the domestic market, lowering thereby their prices and their contribution inflation in Kenya.