Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/65429 
Year of Publication: 
2010
Series/Report no.: 
CREDIT Research Paper No. 10/07
Publisher: 
The University of Nottingham, Centre for Research in Economic Development and International Trade (CREDIT), Nottingham
Abstract: 
This paper investigates the determinants of the real exchange rate (RER) in Ethiopia. In particular, it assesses whether large capital inflows (e.g. foreign aid and remittances) have an impact on the RER. This empirical exercise tries to improve the current literature in a number of ways: (i) the use of quarterly data provides a larger sample size and enables the modelling of important intra-year dynamics, which should lead to better model specifications; (ii) the use of several cointegration approaches allows interesting methodological comparisons; and (iii) the use of a time series model (Unobserved Components) provides a new empirical approach and a robustness check on the econometric models. The results suggest two main (long-run) determinants of the RER in Ethiopia: trade openness is found to be correlated with RER depreciations, while a positive shock to the terms of trade tends to appreciate the RER. Foreign aid is not found to have a statistically significant impact, while there is only weak evidence that workers' remittances could be associated with RER appreciations. The lack of empirical support for the Dutch disease hypothesis suggests that Ethiopia has been able to effectively manage large capital inflows, thus avoiding major episodes of macroeconomic instability.
Subjects: 
Real Exchange Rate
Foreign Aid
Time Series Models
Africa
JEL: 
C22
F35
O24
O55
Document Type: 
Working Paper

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