The Impact of Exchange Rate Fluctuation on International Trade: In Ethiopia
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Date
2022-06
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Addis Ababa University
Abstract
This study investigates the impact of exchange rate fluctuation on international trade in Ethiopia. The research is carried out under the assumption that exchange rate fluctuations are deemed to impact the volume of export and import trading activities. The study made use of secondary data from 1980 to 2021; on the following variables real effective exchange rate (REER), exports (Exp), imports (Imp), real Gross Domestic Product (RGDP), and inflation rate. The data were analyzed using descriptive and econometric methods in this study. Descriptive statistical methods such as mean, standard deviation, and graphical comparisons were used for measuring trends of the real effective exchange rate to compare with export and import sectors. Econometric methods in line with the theoretical and Empirical framework discussed in the literature review section, the following technique are applied, Johansen co-integration technique, vector error correction model (VECM), Granger causality, and variance decomposition to capture both short-run and long-run impact of the exchange rate. The VECM was used to capture both short- and long-run interactions. The results revealed a significant and positive association between the real effective exchange rate, real gross domestic product, and export, but have a negative relationship between inflation and export. At the same time, there is a significant and positive relationship between inflation, real GDP, and imports. However, the real effective exchange rate and imports have a negative relationship. This paper finds evidence that exchange rate fluctuation is the main factor that affects the level of international trade as measured by export and import flows in Ethiopia. It appears that if policymakers wish to promote export and decrease imports to improve the balance of trade in Ethiopia, they have to keep an open eye on steady appreciation of the exchange rate and reduce volatility. Key words: Exchange Rate Volatility, International Trade, Export, and Import