Exchange Rate Pass through in Ethiopia: A Vector Error Correction Model (VEC)

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Addis Ababa University


It is recognized in the literature that exchange rate pass through is a very important instrument in the design of monetary policy, particularly in response to exchange rate shocks. This paper has examined the pattern of exchange rate pass-through to consumer price indices in Ethiopia in the sample period beginning from 1998Q1 up to 2013Q4 with 64 observations. Nominal effective exchange rate (NEER) and consumer price index (CPI) was the centre of investigation in the paper. Error correction model accompanied by impulse response function is applied for analyzing the data. The result shows that there is modest exchange rate pass through of 34 % in the long run. However, there is low exchange pass through in the short run in that it is not much difficult burden for the monetary authority.



Exchange Rate Pass Through