Exchange Rate Pass-through in Ethiopia
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Date
2012-06
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A.A.U
Abstract
The recent sharp devaluation by the central bank aggravates the inflation rate from single
inflation rate of 5.3% in August 20 I 0 to 10.6% in October 20 I 0 following only a month
after the devaluation occurred and 40.1 % in September 20 II after a year. Initiated from
this fact, this paper investigates the exchange rate pass-through to inflation and other
macroeconomic variables in Ethiopia for monthly data ranging from July 2002(the
beginning of Ethiopian fiscal year 2002/03) to June 201 I (the end of Ethiopian fiscal year
2010111). The study apply Six-Variable unrestricted VAR model to estimate the impulse
response functions (IRFs) and variance decompositions (VDCs). In order to measure the
pass-through coefficient to CPI, the study applies standardization of the exchange rate
shock which helps to transform the shock from one standard Deviation to one percent.
Hence the result shows that, on average a percentage chan ge in exchange rate will
increase the consumer price by 4.75% percent in the first year. The exchange rate passthrough
to inflation almost dies out after two years of the exchange rate shock. The result
also suppoli Taylor's hypothesis which states that: high inflation leads to high level of
exchange rate pass-through. Hence, the study concludes that, exchange rate change has
prominent effect on Ethiopian inflation environment.
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Ethiopia Exchange Rate Pass-Through