Modeling the Effect of Exchange Rate on Rwanda Gross Domestic Product Using Co-Integration Approach

This research project aims at Modeling the Effect Exchange rate (US dollar-Rwandan franc) on Rwanda Gross Domestic Product by using co-integration approach of time series. Since, there are few studies talking about this topic of the effect of exchange rate on gross domestic product all over the world and particularly no clear study referred to Rwandan data, that is the reason why the researcher is investigating to see if there is a clear effect that exchange rate can make on gross domestic product. The quarterly time series data of both variables for the period of 20062016 were sourced from National Institute of Statistics of Rwanda and central bank and analyzed, the Population under study altogether forms the sample, and data were analyzed using some statistical software such as E-views and STATA. The Unit roots test was checked for stationary of time series data at 5 % level of significance. Johansen methodology was used to see whether there is a long run relationship or not. The results revealed that the variables were co-integrated using trend and intercept model with one co-integrating equation, so, we applied vector Error Correction Model. Other tests were verified to test the presence of autocorrelation and heteroscedascticity and they were found to be absent. A causality test was also applied and the results showed data there is one directional causality running from Gross Domestic Product to Exchange Rate but not in reverse. Thus, a clear relation was detected; stabilizing monetary policies will boost economy