Exchange Market Pressure and Monetary Policy in Ethiopia
No Thumbnail Available
Date
2018-05
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
In this paper, the study examined the foreign exchange market and try to extract an
exchange market pressure and an intervention index for Ethiopia by following the Weymark
(1995) approach to evaluate the National Bank of Ethiopia exchange rate policy during
2006:Q1 to2017:Q4 using the data obtained from NBE, BLS, IMF and IFS. To address the
problem of endogenity, the study employed the popular Two-Stage Least Squares (2SLS) to
measure the exchange market pressure and developing intervention index. The exchange
market pressure’s mean value of 0.002 provides evidence that depreciating pressure remained
dominant over the entire sample period. However the minimum mean value suggest that
NBE should further depreciate the exchange rate or increase the foreign currency reserve.
Also, the mean value of the intervention index is 0.31, indicating that the foreign exchange
reserve and exchange rate changes absorbed thirty one and sixty nine percent of the pressure,
respectively. Comparing with other countries, NBE’s policy towards the pressure is more
dependent on exchange rate. Otherwise the results of the paper show that on an average there
was a downward pressure on Ethiopia’s currency and the National Bank of Ethiopia
pursued an active intervention policy. Specifically, as the intervention index shows, the
National Bank of Ethiopia used both exchange rate and foreign exchange reserve
interventions for restoring the foreign exchange market to equilibrium levels, a policy known
as the managed float exchange rate regime which is consistent with the existing policy of the
National Bank of Ethiopia.
Description
A study submitted to the department of Management in
partial fulfillment of the requirements for the Degree of
Master of Business Administration in Financial Servicespecialization
in Banking
Keywords
Exchange Rate, Exchange Market Pressure, Intervention Index