This paper empirically investigates the effect of money supply, inflation, foreign reserves, and external debt, on exchange rates among East African partner states over the period from 2000 to 2023.The study analyzed data from countries in the East African region, utilizing fixed-effects regression model. Secondary data was sourced from world bank databases. The final sample included countries that met the inclusion criteria, providing meaningful observations for analysis. The results suggest that money supply and external debt have significant positive relationships with exchange rate, indicating that increases in these factors are associated with appreciating exchange rates. Foreign reserves were found to have a negative and significant effect on exchange rates, indicating that higher foreign reserves help stabilize or strengthen currencies. However, inflation was found to have no significant effect on exchange rates, suggesting that its impact may be overshadowed by other macroeconomic factors. The findings of this study provide valuable insights for policymakers in East Africa, highlighting the importance of managing money supply, external debt, and foreign reserves to stabilize exchange rates. Policymakers can use these results to develop strategies aimed at controlling inflationary pressures and strengthening foreign reserves to mitigate exchange rate volatility. The study also offers guidance for future economic planning and policy formulation.
Sang et al. (Wed,) studied this question.
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