The Real Effective Exchange Rate Volatility on International Trade in Case of Ethiopia: Export-Import Values Perspective
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Date
2022-01
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A.A.U
Abstract
This study aimed to empirically investigate the volatility of real effective exchange rate (REER)
on international trade performance in Ethiopia by using annual time series data from 1981 up to
2019. The Vector Error Correction Model (VECM) has been employed to capture both the short
run and long run relationships among the variables and the findings show that there are
significant relationships between REER and export value as well as between REER and import
value. The Granger causality test have been checked to examine the causal effect of one variable
on other variables; basing on the test results it is evidenced that real effective exchange rate and
import value hold a bi-directional causality on one another while real effective exchange rate
and export value hold a uni-directional causality i.e. real effective exchange rate influences
export value from one side. The data collected has been analyzed by using Eviews Software 10.
The result of the findings indicated that a unit change in real effective exchange rate will lead to
decrease in import and export trade of the country. Therefore, policy makers are required to
focus on alternative policy measures to boost export earnings of the country rather than relying
on the domestic currency depreciation.
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Keywords
Devaluation, Ethiopia, export value, foreign exchange reserve, import value, index, real effective exchange rate, Terms of Trade, Trade openness, VECM, Volatility