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Measuring the real exchange rate misalignment of Ethiopia

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  • Teferi, Mequaninite

Abstract

The paper tries to develop a model for the real exchange rate misalignment of Ethiopia. More specifically, the study attempts to examine whether Ethiopia's real exchange rate is misaligned with respect to its long run equilibrium level and answers such question as: (1) what are the constituent parts of the long run equilibrium RER? (2) Which variables set the movement of the equilibrium real exchange rate? (3) Based on the findings calculate the degree of misalignment and (4) what policy measures could be taken to realign the real exchange rate with its equilibrium level. The empirical estimation results conclude that, terms of trade (TOT), external aid inflows (ODA), commercial policy stance (CPS) and investment to GDP ratio were found to influence the long-run real exchange rate in the case of Ethiopia. However, variables such as nominal devaluation and real money supply found to have no effect on the real exchange rate.

Suggested Citation

  • Teferi, Mequaninite, 2008. "Measuring the real exchange rate misalignment of Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 15(2), pages 1-68, May.
    • Handle: RePEc:ags:eeaeje:249782
    DOI: 10.22004/ag.econ.249782
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    References listed on IDEAS

    as
    1. Peter J. Montiel & Jonathan D. Ostry, 1994. "The Parallel Market Premium: Is It a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries?," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 55-75, March.
    2. Cottani, Joaquin A & Cavallo, Domingo F & Khan, M Shahbaz, 1990. "Real Exchange Rate Behavior and Economic Performance in LDCs," Economic Development and Cultural Change, University of Chicago Press, vol. 39(1), pages 61-76, October.
    3. Mkenda, Beatrice Kalinda, 2001. "Long-run and Short-run Determinants of the Real Exchange Rate in Zambia," Working Papers in Economics 40, University of Gothenburg, Department of Economics.
    4. Balassa, Bela, 1990. "Incentive policies and export performance in sub-Saharan Africa," World Development, Elsevier, vol. 18(3), pages 383-391, March.
    5. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October.
    6. repec:fth:oxesaf:97-16 is not listed on IDEAS
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