The Behaviors and Dynamics of the Real Exchange Rate of the’ Birr’ After the Economic Reform
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Date
2005-06
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A.A.U
Abstract
The paper adopts a single equation approach to examine the real exchange
rate behavior and exchange rate misalignment after devaluation and
foreign exchange I' ate liberalization. The paper finds that real exchange
rate and the macroeconomic fundamentals affecting real exchange rate are
co integrated. It also shows that devaluation, foreign exchange market
liberalization and some of the policy measures taken by government such
as reducing government consumption and deficit, new investment policy
and other measures that increase the capital il'iflow narrow the gap
between the parallel market foreign exchange rate and the official market
foreign exchange rate, make the behavior of the real exchange rate fairly
variable. In other words, the misalignment of the real exchange rate
declines and the exchange rate movement becomes more stable. These are
the desired goals that could be achieved by the devaluation of the exchange
rate and through foreign exchange rate liberalization.
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Keywords
Bilateral official real exchange rates, Bilateral parallel market real exchange rate, Real effective exchange rate, Equilibrium real exchange rates