Monetary Policy and Exchange Rate Shock on Ethiopian Trade Balance: Using SVAR Approach
No Thumbnail Available
Date
2014-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
This paper investigates monetary and exchange rate policy shock on Ethiopian trade balance. Trade balance is the most important macroeconomic variable in every country due to its importance for economic growth and it is affected by monetary and exchange rate policy. To accomplish this study the researcher used Structural Vector Autoregressive model. The time series data included for the study was quarterly data starting from quarter on 1997/98 to quarter four 2012/13. The variables included under study was trade balance which is expressed as a ratio of export to import, consumption gap(foreign- domestic), consumer price index gap(foreign- domestic), reserve money and real effective exchange rate. Stationarity of time series data was tested using ADF test. To select the best lag length information criteria BIC and AIC and others were used lag two was selected as the best lag length. Johansen cointegration test was used to test the existence of long run relationship among variables. SVAR restriction approach based on theory was applied to analyze these variables. The impulse response result shows that exchange rate appreciation improves the trade balance in the short run and deteriorates in the long run which supports the J curve effect. But expansionary monetary policy does not support the existence of J curve effect rather it has cyclical pattern and it affects the trade balance through expenditure switching effect. The expansionary monetary policy dominates the exchange rate effect on explaining the Ethiopian trade balance fluctuation
Description
Keywords
Financial Policy Analysis and Planning