Econometrics

The rate of inflation in an economy has affected the strength of various currencies. It has shown that it can be a major determination factor of how the currency will behave in the foreign market. Our study aims to show that there is a proportional relationship between the value of the Kenyan shilling against the American dollar and the Kenyan rate of inflation. The R software was the dominant software method of analysis used, with the application of basic linear regression package. Graphical methods are also used to clearly show the relationship between the two economic variables. The result of the study showed that an increase of inflation affected the Kenyan shilling negatively. With an increase in inflation, the value of the Kenyan shilling weakened causing it to be bought at a high price and then sold at a lower price, the inverse also proved to be true. Therefore the rate of inflation in an economy does affect how its shilling performs in the international market. The hypothesis is that there exists an inverse linear relationship between the rate of inflation in Kenya and the rate of exchange of the Kenyan shilling to the dollar. When the rate of inflation increases, the value of the Kenyan shilling with respect to the American dollar decreases.