Effect of Treasury Bill Rate on Exchange Rate Level and Volatility in Kenya.

Abstract

Government through central bank sells or purchase Treasury bills to represent government securities’ interest rate in open markets operations with the aim of influencing liaquidity conditions in the financial system. Again central bank make adjustment in the treasury bill rates with the intention of devaluing her currency so as to encourage export and discourage imports. Kenya has been facing high volatility of exchange rate and a continuous depreciation of Kenya shilling to US dollar. Depreciation of the home currency decreases return on investment when investing internationally. A combination of a stable exchange rate environment and a competitive currency attracts investment, increase aggregate output and expand country's economic prosperities. This study aimed at evaluating the effect of 91-day Treasury bill rate on exchange rate level and volatility. Monthly series data on US Dollar-Kenya shilling bilateral exchange rate, 91-day Treasury bill rates, net foreign exchange intervention by central Bank, central bank rate, and inflation rate was purposively selected from January 1997 to June 2016 was used for analysis. Using GARCH model it was found that holding other things equal, a unit change in 91-day Treasury bill rate influence the exchange rate volatility by 2.5790 units in the same direction and at the same time changes the level of exchange rate return by 1.5696 units. Therefore, increasing 91-day Treasury bill rate increases the volatility of the monthly Kenya shilling to US dollar returns and appreciates Kenyan shilling against the US dollar