Effects of Exchange Rate Volatility on French Beans Exports in Kenya

Abstract

In Kenya, exports of French beans are one of the leading foreign exchange earners. Nevertheless, the economic impacts of exchange rate volatility on French beans exports in Kenya are unclear. This paper evaluates the magnitude and direction of the effects of exchange rate volatility on French beans exports from Kenya to its major trading partners in the European Union using monthly data from January 1990 to December 2011. The generalized autoregressive conditional heteroscedasticity model was employed to measure exchange rate volatility. The analytical framework used encompasses estimation of an export demand model, cointegration and specification of an error correction model. The results reveal a negative and significant short and long run effect of exchange rate volatility on French beans exports. Specifically, the empirical results show that a unit increase in exchange rate volatility in Kenya leads to more than proportionate decrease in French beans exports to the European Union. The paper recommends firms to hedge their currency exposures in the short run and implementation of economic policies aimed at stabilizing the exchange rate in the long run to improve Kenya’s export performance.