Effects of Exchange Rate Devaluation and Its Impact on Trade Balance in Ethiopia

Abstract

This study seeks to assess the effects of exchange rate devaluation on trade balance of Ethiopia. The data use in this study was collected from the period 1976-2012. The variables included in the analysis of the study are real effective exchange rate (REER), real gross domestic product (RGDP), official exchange rate (OFF), parallel exchange rate (PARR), Trade liberalization (TL), export value and import value. In the study the augmented dickey filler test (ADF), cointegration and ordinary least square method (OLS) have been used. The unit root test confirms the stationary of all variables at first difference except for real effective exchange rate at the level. The result of Johansson test of co integration indicates the existence of three and four cointegrating equation in export and import equation respectively, confirming the long run relationship between the dependent and independent variables. Regression result indicates that RGDP, PARR and OFF have significant and positive impact on export and import. The premium has negative impact on both export and import and the export have highly significant and positive effect on import. The study recommended that since the economic variables; RGDP, official exchange rate, parallel exchange rate and premium are significant effect on the trade balance in the long run; the policy makers should considered the long run effects of those variables on the balance of trade.