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Impact of Exchange Rate on Ethiopian Trade Balance: Evidence from ARDL Model

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Abstract

The government of Ethiopia has persistently devaluated its currency in which few studies attempted to examine the effect on the country’s trade balance. Hence, this study examined the nexus between the real exchange rate and the trade balance of Ethiopia in the period between 1998 and 2020. The study employed the absorption, elasticity, and monetary approaches as a theoretical framework and the autoregressive distributed lag model as an analytical model. As descriptive analysis revealed, Ethiopia’s export is primarily dominated by agricultural products whereas, the import is largely dominated by capital goods, consumer goods, and fuel. The regression results disclosed that devaluation improves short and long-term trade balance. However, there is no evidence of the J-curve phenomenon. Both home and foreign income are positively and significantly related with the improvement in the trade balance while money supply and government expenditure are negatively and significantly related with the improvement in the trade balance. Hence, promoting domestic economic growth, Birr devaluation, tight fiscal and monetary policy, and reduction of trade barriers would improve the trade balance of Ethiopia.

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Fig. 1

Source: Authors' Computation, 2021

Fig. 2

Source: Authors' Computation, 2021

Fig. 3

Source: Authors’ Computation, 2021

Fig. 4

Source: Authors' Computation, 2021

Fig. 5

Source: Authors' Computation, 2021

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Availability of data and materials

Data and materials that have been used in this study can be provided on reasonable request.

Notes

  1. Real Exchange Rate = \({E}_{t}(\frac{{HP}_{t}}{{FP}_{t}}\)), where \({E}_{t}\), \({FP}_{t}\) and \({HP}_{t}\) denote the nominal exchange rate, foreign price and home price respectively.

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Acknowledgements

Authors acknowledge the National Bank of Ethiopia for providing data for most of the variables used in this study. We also acknowledge Arba Minch University and Ambo University for providing materials and related supports to conduct this study.

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No funding was received for this study.

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Authors and Affiliations

  1. Economics Department, School of Business and Economics, Arba Minch University, Arba Minch, Ethiopia

    Fassil Eshetu

  2. Management Department, College of Business and Economics, Ambo University, Ambo, Ethiopia

    Nega Eshetu

Authors
  1. Fassil Eshetu
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  2. Nega Eshetu
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Contributions

Despite the dichotomous results in the literature on the impact of exchange rate on trade balance, the Ethiopian government has persistently devalued its currency. Thus, the authors examined the nexus between exchange rate and the trade balance of Ethiopia using the absorption, elasticity and monetary approaches as the theoretical framework and the autoregressive distributed lag model as analytical model.

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Correspondence to Fassil Eshetu.

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This article does not contain any studies with human participants performed by any of the authors.

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Eshetu, F., Eshetu, N. Impact of Exchange Rate on Ethiopian Trade Balance: Evidence from ARDL Model. Ann. Data. Sci. 10, 1217–1236 (2023). https://doi.org/10.1007/s40745-021-00360-x

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  • DOI: https://doi.org/10.1007/s40745-021-00360-x

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