Trade Liberalization and the Balance of Payment: Empirical Evidence from Ethiopia
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Date
2005-06
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A.A.U
Abstract
The effect of trade liberalization on the trade balance and current account of the balance of
payments is controversial irrespective of the framework used for the analysis of balance of
payments. In the partial equilibrium farm work of the elasticity approach, the effect will depend
on the extent to which export and import duties change and the price elasticity of exports and
imports. In the general equilibrium framework of the absorption approach to the balance of
payments, the effect of liberalization 'will depend on how real income is affect relative to real
consumption expenditures. In the monetary approach to balance of payments, the liberalization
could affect both demand and supply of real money balances.
The aim of this paper is to examine the empirical analysis of the balance of payments
consequences of trade liberalization of Ethiopia. It focuses on the impact of trade liberalization
on the trade and current account balances of the balance of payments. The main question
addressed is whether there has been an improvement or deterioration in these accounts following
trade reform. The data analyzed by estimating the time series econometric models using OLS and
ECM frame works to test the impacts of trade liberalization on trade balance and the current
account of the balance of payments in the short-run and the long-run. It uses a regression model
formulation, which includes domestic and world real income; real effective exchange rate and
money so that the monetary, elasticity and absorption approaches to the balance of payments are
also examined. The main findings are that trade liberalization has worsened the balance of trade
and the current account balance deficit, because imports have increased more rapidly than
exports. The results show also that real effective exchange rate does playa role in determining
the long-run equilibrium behavior of the Ethiopian trade and the current account balance. The
coefficient of domestic money supply variable is negative and statistically significant. This
implies that domestic money supply has an effect on trade and current account balance
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Keywords
Balance of Payment:, Empirical Evidence from Ethiopia