Ethiopia adopted a repeated Dutch auction for foreign exchange in May, 1993. Various African countries with rudimentary financial systems and thin foreign exchange markets have successfully employed auctions in transition from centralised, controlled systems to decentralised interbank markets. This paper characterises the rules, regime shifts and auction outcomes in Ethiopia. Models for the Central Bank's supply rules for pre-announced supply of dollars in fortnightly and later weekly auctions, confirm the objective was to stabilise the exchange rate (the marginal auction price) in a thin market around depreciating trends. Bidders were able to learn the supply rules, clustering their bids around predicted target rates. Using a method novel in auction empirical literature, bidders' learning in repeated auctions is examined via the adjustment to equilibrium in error correction equations for the bid spread. Robust models for a similar learning process were found across both frequency regimes; but learning was faster where the exchange rate target was more transparent and uncertainty lower. A fairly stable depreciation was thus achieved, despite regime shifts from trade liberalisation, the progressive lifting of auction entry barriers, increased frequency of auctions, fiscal and other seasonality in demand, and temporary price shocks in coffee export earnings.
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Paper provided by Centre for the Study of African Economies, University of Oxford in its series Working Papers Series with number
98-11.
Length: 30 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:oxesaf:98-11
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