The Effect of Real Effective Exchange Rate in Output of Ethiopian Economy

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The main objective of this study was to examine the effect of real effective exchange rate on trade and the Ethiopian economy at large. This study covers the period from 1980/1981 up to 2018/2019 of Ethiopian macroeconomic data. Firstly, export and import equations are estimated through OLS on the first differences of the dependent and independent variables after conducting the required time series tests to check whether or not the Marshall-Lerner condition holds. The estimation results show that devaluation affects export performance negatively because of the fact that our exports are largely primary products; which are price and income inelastic. Devaluation affects import negatively as expected; because imports become expensive than before in terms of local currency. Some exported goods use imported intermediate inputs, whose cost increases as a result of depreciation and negatively affect export performance. The effect of REER on real GDP of Ethiopia is investigated with the use of VECM and the result suggested that REER affect the real output of the Ethiopian economy negatively. The policy implication is rather than devaluing the currency constantly to stimulate export and improve trade balance; government continue to subsidize the export sector that help reduce dependency on imported goods.



Devaluation, Marshall Lerner Condition, Real Effective Exchange Rate