The Impact of Real Effective Exchange Rate on Trade Balance in Ethiopia
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Date
2016-06
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Addis Ababa University
Abstract
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.
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Keywords
Real Effective Exchange Rate on Trade Balance in Ethiopia