The Effect of Devaluation on Major Macro Variables (The Ethiopian Case)

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A Time series econometrics technique especially error correction Method employed for analyzing the efficiency of devaluation on Ethiopian economy. Secondary data was collected for the period 1964-1965 from different publication and government office . Edward's real exchange, current account and output model adopted for the study; moreover, Elbadawi' s real exchange and price model was applied for the study. The result confirmed that devaluation could not lead to stagflation circumstance. It was rather expansionary (increasing output and employment) and inflationary. The result of this study adheres the view of that when initial condition of the economy at real exchange appreciation, nominal devaluation could accelerate the process of convergence towards its equilibrium. Devaluation improved the current account balance because of the increment of aid to the country after devaluation; however, it did not improve the trade balance due to the fact that the premium declined considerable degree but not abolished.



Ethiopian Case, Major Macro Variables