An Empirical Analysis of the Determinants of the Current Account In Ethiopia (1961/62 - 1999/00)

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Addis Ababa University


This study analyzes the role of fundamental macroeconomic variables in explaining the movements of the current account balance in Ethiopia and describes the trends and profiles of the current account balance and its major components in three different regimes using data covering the period 1961/62-1999/00. Current account in Ethiopia had been in a persistent deficit due to the poor performance of exports to finance the growing import bills. In estimating the model, the ADF tests for unit root show that all the variables are integrated of order one. The Johansen’s likelihood ratio test for co-integration indicates that there is one co-integration vector. The test for weak exogeneity also suggests that all the explanatory variables except capital flow are weakly exogenous, while the exogeneity test for current account balance is strongly rejected. The empirical results reveal that budget balance, broad money, relative income and terms of trade affect the current account balance significantly both in the long run and in the short run, while the effects of dependency ratio and openness are significant only in the short run. The policy implication of the findings is that reducing budget deficit, controlling monetary expansion, controlling birth rate (through family planning), achieving overall economic development, improving the diversity and quality of exports and liberalizing external trade will eliminate the persistent deficits of the Ethiopian current account balance. Key words: determination of current account, inter-temporal substitution effect, consumption smoothing effect, co-integration analysis, and error correction method.



Determination of current account, Inter-temporal substitution effect, Consumption smoothing effect, Co-integration analysis