| 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. |
