|Wassie, Y. (2012) The effect of currency devaluation on output: the case of Ethiopian economy. Jimma University 98.Jimma: Jimma University.
|The objective of this paper is to analyze the short and long run effect of currency
devaluation on output growth in Ethiopia. The study is conducted by using quarterly time
series data over the period ranging from 1997/98 to 2009/10 and employing a Vector
Auto regression model. By controlling for monetary and fiscal policy, the study found
that currency devaluations are contractionary in the long run and neutral in the shortrun.
Other results are that monetary policy has the expected positive effect on output
growth, while an increase in total government expenditure has negative effect. Moreover,
this study clarify that devaluation explains a considerable part of real gross domestic
product change in Ethiopia. Since the Ethiopian output is dominated by primary
agricultural products and it is insensitive for the change in exchange rate, it is not
possible the government allowing market forces to determine the value of Ethiopian birr.
Policy intervention is needed to balance the adverse impact of exchange rate movements
until the economy well transformed from agricultural sector to industrial sector and
becomes less dependent on imported raw materials. Thus, monetary policy suggested a
bigger role since it affects the total output positively and significantly.
Key words: Currency Devaluation, Output, VAR
|The effect of currency devaluation on output: the case of Ethiopian economy