Macroeconomic stability factors and trade competitiveness Nexus Kenya

Abstract

This study investigates the influence of key macroeconomic stability factors—exchange rate, inflation, foreign direct investment (FDI), and gross domestic product (GDP)—on trade competitiveness in Kenya. Using annual time-series data from 1993 to 2023 sourced from the World Bank and the Central Bank of Kenya, the study employs a quantitative research design guided by the New Open Economy Macroeconomics (NOEM) framework. The data were analyzed using descriptive statistics, Augmented Dickey-Fuller (ADF) unit root tests, Johansen cointegration, Granger causality, and regression analysis. The findings indicate that all variables are integrated of order one and share a long-run equilibrium relationship. Granger causality tests show that there is a two-way relationship between the exchange rate and trade competitiveness and between GDP and competitiveness. There is only one way for FDI to affect competitiveness. Regression estimates demonstrate that a 1% depreciation in the exchange rate and a 1% rise in inflation reduce trade competitiveness by 0.642% and 0.488%, respectively. Conversely, a 1% increase in FDI and GDP enhances competitiveness by 0.521% and 0.491%, respectively. The study concludes that macroeconomic stability is a critical determinant of Kenya's trade performance. Policy recommendations include maintaining a stable and competitive exchange rate, anchoring inflation expectations, attracting targeted FDI, and fostering GDP growth through economic diversification to bolster Kenya's position in regional and global markets.