The Determinant of Aggregate Import Demand in Ethiopia: Co Integration Analysis.
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Date
2008-06
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Addis Ababa University
Abstract
In this paper, the determinant of Ethiopia aggregate demand is studies using yearly data in the period 1971/2 to 2006/7. The main objective of the paper is to identify the main determinant of Ethiopia import and the relative elasticity of explanatory variables. The augmented dickey fuller and Phillips Peron test is used to test the unit root test. Johansen co integration and error correction model is employed on yearly data in order to approve the existence of long run relationship and to identify the long run and short run relationship. The main finding is that, in the long run Ethiopia import is mainly affected by real effective exchange rate, real gross domestic product and relative price. It shows elastic import demand with respect to explanatory variables except relative price. The sign of real effective exchange rate is unexpected in the long run. The short run adjustment coefficient is identified and has a correct negative sign; however, most of the coefficients of short run variables are statistically insignificant. The implication of the finding is that, ineffectiveness exchange rate policy in the long run, effectiveness of pricing policy and difficulty of substituting imported goods by domestic product.
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Determinant of Aggregate Import Demand