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Relationship Among Interest Rates, Money Supply, Inflation and Foreign Exchange in Kenya

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Relationship Among Interest Rates, Money Supply, Inflation and Foreign Exchange in Kenya RELATIONSHIP AMONG INTEREST RATES, MONEY SUPPLY, INFLATION AND FOREIGN EXCHANGE IN KENYA KARISA SIMON A RESEARCH PROJECT REPORT SUBMITTED TO THE SCHOOL OF BUSINESS IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE FINANCE OPTION, GRETSA UNIVERSITY NOVEMBER, 20 1 i Contents DECLARATION ........................................................................... Error! Bookmark not defined. ACKNOWLEDGEMENT. ............................................................................................................. v DEDICATION ............................................................................................................................... vi ABBREVIATIONS ...................................................................................................................... vii ABSTRACT ................................................................................................................................. viii CHAPTER ONE: INTRODUCTION ............................................................................................. 1 1.0 Introduction ........................................................................................................................... 1 1.1 Background of the study ....................................................................................................... 1 1.2 STATEMENT OF RESEARCH PROBLEM ....................................................................... 3 1.3 PURPOSE OF THE STUDY ................................................................................................ 4 1.4 CONCEPTUAL FRAMEWORK ......................................................................................... 4 Independent variable ................................................................................................................ 4 1.5 Objectives of the study .......................................................................................................... 5 1.5.1 General objective ............................................................................................................ 5 1.5.2 Specific objectives of the study were to; ........................................................................ 5 1.6 Hypothesis of the study ......................................................................................................... 5 1.7 Significance of the study. ...................................................................................................... 5 1.9 Limitation of the study .......................................................................................................... 6 CHAPTER TWO: LITERATURE REVIEW ................................................................................. 7 2.1 Introduction ........................................................................................................................... 7 2.2 Interest rate and foreign exchange ........................................................................................ 7 2.3 Money supply and foreign exchange .................................................................................... 7 2.4 inflation and foreign exchange .............................................................................................. 8 2.5 Theoretical framework .......................................................................................................... 8 ii 2.5.1 Keynesian monetary theory ............................................................................................ 8 2.5.2 Quantity theory of money ............................................................................................... 8 2.5.3 Purchasing power parity theory ...................................................................................... 8 2.6 Summary of identified gaps .................................................................................................. 9 CHAPTER THREE: RESEARCH METHODOLOGY ............................................................... 10 3.2 The research design ............................................................................................................. 10 3.3 Study area ............................................................................................................................ 10 3.4 Target population ................................................................................................................ 10 3.5 Sampling technique. ............................................................................................................ 11 3.6 Measurement of variables ................................................................................................... 11 3.7 Research instruments........................................................................................................... 12 3.8 Validity of measurements.................................................................................................... 12 3.9 Reliability of measurements ................................................................................................ 12 3.10 Data collection techniques ................................................................................................ 12 3.11 Data analysis ..................................................................................................................... 13 3.12 Logistical and ethical consideration .................................................................................. 13 CHAPTER FOUR: FINDINGS AND DISCUSSIONS ............................................................... 14 4.1 Introduction ......................................................................................................................... 14 4.2 Descriptive statistics ............................................................................................................ 14 4.2.1 Exchange rate ............................................................................................................... 14 4.2.2 Interest rates .................................................................................................................. 15 4.2.3 Money supply ............................................................................................................... 16 4.2.4 Inflation ........................................................................................................................ 16 4.3 Regression analysis ............................................................................................................. 18 4.3.1 Interest rate and foreign exchange rate ......................................................................... 19 iii 4.3.2 Inflation and foreign exchange rate .............................................................................. 19 4.3.3 Money supply and foreign exchange rate ..................................................................... 20 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS. ................................................. 21 5.1 Introduction ......................................................................................................................... 21 5.2 Summary of findings ........................................................................................................... 21 5.2.1 Interest rate and foreign exchange rate ......................................................................... 21 5.2.2 Inflation and foreign exchange rates ............................................................................ 21 5.2.3 Money supply and foreign exchange rates ................................................................... 22 5.3 Conclusion ........................................................................................................................... 22 5.4 Suggestion on further studies .............................................................................................. 22 REFERENCES ............................................................................................................................. 24 iv ACKNOWLEDGEMENT. I wish to express my heartfelt appreciation to my family for their unwavering support for me during my academic journey at Gretsa University. My sincere gratitude goes to my supervisor, Madam Serah Wagio who dedicated her precious time; for her guidance and constructive advice during the period of this research proposal writing to ensure my work was up to par with the requirements of the real world. In addition, All above all, I thank the Almighty God who has seen me through up to this level, was my pillar of strength, life giver and greatest source of advice and ideas. Thank you all and God bless you all. v DEDICATION This research project is dedicated to my mother kanze karisa, my brothers and sisters, without whom my academic potential would not have been realized. I say thank you to the support they gave me during my academic life. vi ABBREVIATIONS CBK -Central Bank of Kenya CBK -Central Bank Rate KSH -Kenya Shillings KNBS -Kenya Bureau of Statistics USD -United States Dollar SPSS -Statistical Package for Social Sciences vii ABSTRACT The general objective of the study was to establish the relationship among interest rates, money supply, inflation and foreign exchange. The specific objectives of the study included the following; understanding how interest rate affects the foreign exchange rates in Kenya, determine how the level of money supply in an economy has an impact on the rates of foreign exchange
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