IJSSER

Title: Effect of Short-Term Capital Flows on Real Exchange Rate in Kenya
Authors: Lilian, M. Mugambi , Dennis, K. Muriithi and Patricia G. Mwangi
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Lilian, M. Mugambi.1 , Dennis, K. Muriithi.2 and Patricia G. Mwangi.3 1,2,3. Department of Social Sciences, Chuka University, P.O. Box 109-60400, Chuka, Kenya
MLA 8 Mugambi, Lilian, M., et al. "Effect of Short-Term Capital Flows on Real Exchange Rate in Kenya." Int. j. of Social Science and Economic Research, vol. 9, no. 8, Aug. 2024, pp. 2587-2703, doi.org/10.46609/IJSSER.2024.v09i08.008. Accessed Aug. 2024. APA 6 Mugambi, L., Muriithi, D., & Mwangi, P. (2024, August). Effect of Short-Term Capital Flows on Real Exchange Rate in Kenya. Int. j. of Social Science and Economic Research, 9(8), 2587-2703. Retrieved from https://doi.org/10.46609/IJSSER.2024.v09i08.008 Chicago Mugambi, Lilian, M., Dennis, K. Muriithi, and Patricia G. Mwangi. "Effect of Short-Term Capital Flows on Real Exchange Rate in Kenya." Int. j. of Social Science and Economic Research 9, no. 8 (August 2024), 2587-2703. Accessed August, 2024. https://doi.org/10.46609/IJSSER.2024.v09i08.008.
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ABSTRACT: Short-term capital flows that are continuous have two disadvantages. Although they are attractive to investors, their tendency toward volatility and reversals increases the possibility of causing instability in the macroeconomy. There's little question that Kenya's open account policy and Vision 2030 goals will attract more short- and long-term investment. The research investigated how Kenya's macroeconomic indicators were impacted by short-term capital flows. The explicit goal was to ascertain how net short-term capital flows affected Kenya's actual exchange rates. In the study, series data spanning the years 1980–2018 were used. At that time, market liberalization was underway, and Kenya had begun to implement structural adjustment programs. The study used a correlational research approach utilizing e-views, ox-metrics, and STATA software to assess the model at a 5% significant level. The procedure of assessing the hypothesis included the use of t-ratios and P-values. To ascertain if the time series data were stationary, a unit root test utilizing the Augmented Dickey-Fuller test was performed. To ascertain if there was a long-term link between the variables, co-integration and error correction techniques were applied. To ascertain the nature of the link that existed between the variables, the Granger causality test was used. In order to evaluate the multicollinearity, autocorrelation, and heteroscedasticity assumptions, the Variance Inflation Factor, Durbin-Watson statistic, and Breusch-Pagan tests were applied. The results showed that short-term capital flows significantly and unfavorably affected real exchange rates (t-prob 0.000–0.05). The study suggested preventing the detrimental impacts of net short-term capital flows before they affect the whole economy.

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