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Article Number - C718CC067030


Vol.9(11), pp. 103-119 , December 2017
DOI: 10.5897/JEIF2017.0864
ISSN: 2006-9812



Full Length Research Paper

Birr devaluation and its effect on trade balance of Ethiopia: An empirical analysis



Fassil Eshetu
  • Fassil Eshetu
  • Department of Economics, College of Business and Economics, Arba Minch University, Ethiopia.
  • Google Scholar







 Received: 11 August 2017  Accepted: 10 October 2017  Published: 31 December 2017

Copyright © 2017 Author(s) retain the copyright of this article.
This article is published under the terms of the Creative Commons Attribution License 4.0


This study examined the effect of Birr devaluation on trade balance of Ethiopia for the period 1970-2014 using the Vector Error Correction Model. The key results of the present study revealed that Birr devaluation deteriorates the trade balance of Ethiopia in the short run and improves it in the long run. Moreover, the result from the long and short run models showed that real effective exchange rate, money supply, domestic real income and term of trade are the major determinants of the trade balance of Ethiopia both in the short and long run. Besides the short and the long run model, the impulse response function and the descriptive analysis revealed that a J-curve phenomenon exists for the trade balance of Ethiopia. That means, the finding of this study showed that the Marshall-Lerner Condition holds only in the long run. So, the present study revealed that the elasticity, monetary and absorption theories are significant in explaining the trade balance of Ethiopia. The policy implication is that policies that encourage productivity improvements, diversification of the export sectors and expansion of import computing industries are alternative policies for devaluation. Moreover, government may need to be conservative in using devaluation (exchange rate policy) to improve trade balance as it may worsen the situation in the short run. Thus, the country on the process of industrialization, first needs to promote import computing industries and then, once the production gets its way, devaluation would be clear.

 

Key words: Marshal Lerner condition, currency devaluation, J curve phenomenon, co-integration analysis.

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APA Eshetu, F. (2017). Birr devaluation and its effect on trade balance of Ethiopia: An empirical analysis. Journal of Economics and International Finance, 9(11), 103-119.
Chicago Fassil Eshetu. "Birr devaluation and its effect on trade balance of Ethiopia: An empirical analysis." Journal of Economics and International Finance 9, no. 11 (2017): 103-119.
MLA Fassil Eshetu. "Birr devaluation and its effect on trade balance of Ethiopia: An empirical analysis." Journal of Economics and International Finance 9.11 (2017): 103-119.
   
DOI 10.5897/JEIF2017.0864
URL http://academicjournals.org/journal/JEIF/article-abstract/C718CC067030

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