Exchange Market Pressure and Monetary Policy in Ethiopia

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Addis Ababa University


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.


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


Exchange Rate, Exchange Market Pressure, Intervention Index