The interest rates for the central bank of Kenya have had different faces since 1991 with the rate changing as the economy of the country keeps on shifting from worst to best. At the moment, the exchange rates in Kenya stand at 8.5 percent as compared to that adopted by the Federal Reserve System (FED) of America which stands between 0 and 0.25 percent. From the year 1991 to 2014, the average exchange rate for Kenya is 14.62 percent. Kenya recorded a record of 84.67 percent in July 1993. At this time, the FED was enjoying the exchange rate of 3.02 percent. However, the exchange rates of Kenya became better and in the year 2003, the country recorded a lower exchange rate of 0.83 percent. This record was far better than that of the FED, which at the moment stood at 1.02 percent. Comparing the interest rates of Kenya and that of the US, a conclusion can be arrived at that the American exchange rates are more favorable as compared to Kenya.
Kenya is enjoying the victory of the economic might in Southeastern and Central Africa in terms of GDP. Since the year 1960 to 201, the country has recorded an average of 10.65 USD billion GDP. The country reached an all-time high of 44.10 USD billion in 2013 and recorded a low GDP of 0.90 USD billion in 1962. The World Bank reports the GDP in Kenya. Whereas the Kenyan GDP only represents only 0.70 percent of the world economy, the US GDP is recording a higher percentage of the world economy at 27.10 percent. US GDP was recorded highest in 2003 at 16800 USD billion in 2013. This value is much higher than the Kenyan GDP, which was recorded at 44.10 billion USD. According to an average GDP of 6145.56 USD billion from 1960, US are far from comparison with the Kenyan economy. The difference in the GDP, however, can be due to the different economic challenges facing the two countries. Comparing the political stability of America with that of Kenya, US are far better. These challenges with many more show the reason there is such huge parity. Apart from the challenges, the geographical coverage of America is bigger than that of Kenya and thus could record a huge GDP.
The US dollar has been used as a benchmark for exchange rates. The exchange rates of the Kenya shillings to the US dollar in the past twenty years have indicated that the USD is far stronger than the KES, which has struggled to keep the pace of the ever-changing market trends. Comparing to how the KES has exchanged with other currencies like Euros, the USD show might to the KES counterpart. Currently, the exchange rate of the one USD is KES 89.6057 for purchase and 89.KES 4454 for selling. The exchange rate between KES and Euros at the moment is 111.8674. This means that one Euro is equivalent to 111.8674 KES. On the other hand, the USD is showing might over the Euro recording an exchange rate of 0.801129. This shows that one Euro is equivalent to 1.24824 USD. The exchange rates of the USD and KES are thus totally incomparable. The USD looks higher than the KES as far as the exchange rates are concerned.
Comparing the international capital market of Kenya to that of the US, we find that the US economy is more appealing than that of Kenya. With lower interest rates, the borrowing of money from the American banks is higher than in Kenya. Apart from the higher borrowing rates, the people of America also have the higher tendency of saving than Kenyans. The stocks and bonds from the government also uplift the policy. The Kenyan weak economy, on the other hand, leads to poor savings and hence imperfect international capital market.
The particular PPP theory that states that the exchange rate between currencies of two countries should have the same value of a basket of commodities in both the countries to some extent does not work for the Kenyan economy. The price for goods and services keeps on changing due to lack of regulations and thus very difficult to predict. The interest rate parity, on the other hand, is a complex method given the different exchange rates in the world. The interest rate being higher in Kenya and low in the US will mean that when one borrows the same amount of money in Kenya and the US, the returns will have parity. Not the equal amount would be earned as an interest.
Gravity model was until recently a relatively not discussed factor in economics. Its study and review have, however, come with a number of benefits. The spatial relations described by the gravity has been richly and accurately been estimated. The bilateral trade flow of different countries has been studied using the gravity. Kenyan economy has not been left behind in this study. The differences between the American economy and the Kenyan economy can thus be studied using the differences in the distance of the two countries’ GDPs.
The international monetary policy coordination is focused on preventing the national monetary authorities from strategically manipulating the terms of trade by means of stabilizing its policy instruments. The stability will mean a stronger world economy that is free from fluctuations. Through this, no country will enjoy on the slumber of another country. Demand curves are important as they are used to estimate the behaviors in a competitive market. Combined with the supply curve, both can use to determine the equilibrium price. The two are important in any economic setup so as to establish an economy where no parties feel advantaged. With the relative demand curve and the supply curve, the buyers will get the goods and services at a price they can afford while the sellers will not be disadvantaged.
The dynamic and steady state in optimizing two sectors small economy model can be determined by fiscal expansion, whether temporary or permanent. Unlike in the temporary expansion, foreign assets are usually positioning worse in the long run fiscal expansion. However, the investment and the current account might adjust none monotonically in both temporary and permanent fiscal expansion.
Since the world war two, Kenya has faced different challenges in its quest to have a stable economy, these challenges, however, did not face Kenya alone. Almost all countries that participated in the world war felt the pressure. The economic growth of Kenya has tough been on the rise. The AA curve of Kenya has been shifting upwards. This upward shift in the curve since world war two means that the money supply, foreign interest rate and the expected exchange rate of Kenya has increased. This can also mean that the domestic prices have decreased. The DD curve on the other hand shifts rightwards. This is an indicator that the government demands, investment demands, transfer payment and the foreign prices has increased, or it can also be due to a decrease in the taxes and domestic price.
The relative demand of the Kenyan economy has though not met the supply. The demand has overweighed the supply since independence, meaning that the country would depend much on the foreign aid and imports. This means an adverse effect to the economy. The relative demand curve and that of supply has thus not balanced. Therefore, no equilibrium have been reached since the world war two.
The IS-LM model can well define the economic growth of Kenya after the world war two. The aggregate demand curve can be arrived at combining the IS curve and the ML curve. The model shows that the country is responding positively to fiscal and monetary policy. The high-interest rates that Kenya faces have led to the economy and the model indicates that the country is recording a lower equilibrium income.
Karayalcin, Cem. “Temporary and Permanent Government Spending In a Small Business Economy.” Journal Of Monetary Economics 1999: 125-141.
Mahbub Morshed and Stephen Turnovsky, (2003). Sectorial Adjustment Costs and Real Exchange Rate Dynamics in a Two-Sector Dependent Economy. The University Of Washington, Department Of Economics Pg. 147-177.