Determinants of Trade Balance in Ethiopia: Evidence from ARDL Model

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This study investigates the determinants of trade balance in Ethiopia, covering the period 1981–2018. Specifically, the study tests the validity of the Marshall-Lerner condition and the J-curve effect and further assess the effect of other macroeconomic variables. Auto-regressive distributed lags (ARDL) and Error correction model (ECM) were applied. Exchange rates, GDP growth, inflation rate, money supply as a percent of GDP, external debt as a percent of GDP and trade openness were used as predicator variables. The estimation result reveals that lagged value of trade balance, inflation rate, exchange rate, external debt and GDP growth are found to have positive statistically significant effect on trade balance in the long run. On the other hand money supply has negative effect. In the short run GDP growth, external debt and money supply have negative significant effect while inflation rate have significant positive effect on trade balance. The ECM coefficient reveals that short run deviation from equilibrium is adjusted towards long run equilibrium by the speed of 56 percent. Based on the results revealed, it is recommended that the government should devaluate the currency coupled aggressive expansion domestic production level. The study concluded that the existence of the Marshall-Lerner condition in Ethiopia since in the long run there is a positive relationship between the exchange rate and the trade balance. In order to progress towards a favorable trade balance which aimed at reducing persistent deficits, the government should devalue the currency coupled with different export diversification strategy.


A Thesis Submitted to the School of Graduate Studies of Addis Ababa University in Partial Fulfillment of the Requirements for the Degree of Masters of Business Administration


Exchange rate,, Trade balance