The Impact of Real Effective Exchange Rate on Trade Balance in Ethiopia

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title


Addis Ababa University


In the era of globalization, global macroeconomic crises and the changes in the international trade pattern have accentuated the need for clearer understanding of the factors underlying a country’s balance of trade position. In this onset, this paper examines the short run and long run effect of real effective exchange rate on trade balance of Ethiopia together with other variables that assumed to have effect on trade balance such as real GDP, government consumption, money supply and trade openness. The Autoregressive Distributed Lag (ARDL) Approach is used for analysis time serious annual data of period 1979/80 to 2013/34. Different diagnostic tests are under taken to check this time series data consistency and stability of selected model. As econometrics result reveals that these macro economic variables have short run as well as long run positive and significant effect on trade balance of the country except money supply, which has negative effect in the short run. That is in the short run real GDP , real exchange rate, government expenditure and trade openness have positive effect on trade balance of the country, while money supply has negative effects. Where as in the long run: real GDP, real effective exchange rate, money supply, government consumption and trade openness have significant and positive effect on trade balance. Based on the result I conclude that real effective exchange rate has short as well as long run effect on trade balance. To handle this series effect and reduce this continual deficit on trade balance government have to formulate strong controlling mechanism on monitory policy and trade structure of the country.



Real Effective Exchange Rate on Trade Balance in Ethiopia