The Impacts of Effective Real Rate of Exchange on the Ethiopia Economic Growth (1974-2020)

This examine attempts to investigate the impact of actual (real) exchange rates on economic growth in Ethiopia the usage of annual time series data spanning from 1974 to 2020. The explanatory variables in this have a look at have been real effective exchange rate, government final consumption expenditure, gross fixed capital formation, broad money supply and trade openness. The research adopted Solow (1956) endogenous growth model. They have a look at used both descriptive and empirical techniques. The development of public real exchange and its components and the growth pattern of the economy were addressed underneath the descriptive analysis part. To empirically analyze the relationship among the variables the Johansson take a look at for co integration and Vector Error correction Mechanism have been employed in order to investigate the long run and short run relationship among the dependent variable GDP and components of real exchange rate respectively. Before estimating the longer term model the stationery of the statistics changed into examined into ADF and PP assessments and result suggests everyone elements are considered of order one. Then, the CO-integration lest was conducted and concluded that there is only one co integrating equation among variables. The long run test and result showed that, trade openness and government capital formation has insignificant effect on economic growth. Both export and broad money supply has positively and significant effect on GDP growth. The examiner recommended that the Ethiopia government final consumption has a negative effect on the GDP growth (increase). In the short run the VEC model end result showed that trade openness and broad money supply has positively and significant effect on GDP growth. The examiner recommend that the Ethiopian government should shift is expenditure to productivity sectors and should make certain the appropriate implementation of price range allocations promoting import substitution strategy through subsidies to the domestic industries to discourage import substitution strategy through subsidies to the domestic industries to discourage over reliance on imported goods and alternative their imported inputs and reducing taxes to their imported semi- finished products and reducing the price for credit in Home market.