Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia
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.
|Date of creation:||Oct 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 1273 678889
Fax: +44 (0)1273 873715
Web page: http://www.sussex.ac.uk/economics
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ogun, O., 1998. "Real Exchange Rate Movements and Export Growth: Nigeria, 1960-1990," Papers 82, African Economic Research Consortium.
- Phillips, Peter C B & Hansen, Bruce E, 1990.
"Statistical Inference in Instrumental Variables Regression with I(1) Processes,"
Review of Economic Studies,
Wiley Blackwell, vol. 57(1), pages 99-125, January.
- Tom Doan, . "FM: RATS procedure to estimate cointegrating vectors using Fully Modified Least Squares," Statistical Software Components RTS00069, Boston College Department of Economics.
- Joannes Mongardini & Brett Rayner, 2009. "Grants, Remittances, and the Equilibrium Real Exchange Rate in Sub-Saharan African Countries," IMF Working Papers 09/75, International Monetary Fund.
- Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
- Christopher Adam, 2006.
"Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries,"
Economics Series Working Papers
WPS/2006-04, University of Oxford, Department of Economics.
- Buffie, Edward & Adam, Christopher & O'Connell, Stephen & Pattillo, Catherine, 2008. "Riding the wave: Monetary responses to aid surges in low-income countries," European Economic Review, Elsevier, vol. 52(8), pages 1378-1395, November.
- Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Patillo, 2006. "Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries," CSAE Working Paper Series 2006-04, Centre for the Study of African Economies, University of Oxford.
- James G. MacKinnon, 1995.
"Numerical Distribution Functions for Unit Root and Cointegration Tests,"
918, Queen's University, Department of Economics.
- MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
- H Issa & B Ouattara, 2004.
"Foreign Aid Flows and Real Exchange Rate: Evidence from Syria,"
The School of Economics Discussion Paper Series
0408, Economics, The University of Manchester.
- H. Issa & B. Ouattara, 2008. "Foreign Aid Flows And Real Exchange Rate: Evidence From Syria," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 33(1), pages 133-146, June.
- Stephen J. Turnovsky & Serpil Tekin & Valerie Cerra, 2008. "Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy," IMF Working Papers 08/204, International Monetary Fund.
- Whitney K. Newey & Kenneth D. West, 1986.
"A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix,"
NBER Technical Working Papers
0055, National Bureau of Economic Research, Inc.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- Chow, Gregory C & Lin, An-loh, 1971.
"Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series,"
The Review of Economics and Statistics,
MIT Press, vol. 53(4), pages 372-75, November.
- Tom Doan, . "DISAGGREGATE: RATS procedure to implement general disaggregation (interpolation/distribution) procedure," Statistical Software Components RTS00050, Boston College Department of Economics.
- Tom Doan, . "CHOWLIN: RATS procedure to distribute a series to a higher frequency using related series," Statistical Software Components RTS00036, Boston College Department of Economics.
- Hylleberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988.
"Seasonal, Integration And Cointegration,"
6-88-2, Pennsylvania State - Department of Economics.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- James H. Stock & Mark W. Watson, 1991.
"A simple estimator of cointegrating vectors in higher order integrated systems,"
Working Paper Series, Macroeconomic Issues
91-3, Federal Reserve Bank of Chicago.
- Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
- repec:cup:cbooks:9780521633239 is not listed on IDEAS
- Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
- Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
- van Wijnbergen, Sweder, 1985.
"Macroeconomic Aspects of the Effectiveness of Foreign Aid: On the Two-Gap Model, Home Goods Disequilibrium and Real Exchange Rate Misalignment,"
CEPR Discussion Papers
45, C.E.P.R. Discussion Papers.
- Wijnbergen, Sweder Van, 1986. "Macroeconomic aspects of the effectiveness of foreign aid: On the two-gap model, home goods disequilibrium and real exchange rate misalignment," Journal of International Economics, Elsevier, vol. 21(1-2), pages 123-136, August.
- Christopher Adam & David Bevan, 2004.
"Aid and the Supply Side: Public Investment, Export Performance and Dutch Disease in Low Income Countries,"
Economics Series Working Papers
201, University of Oxford, Department of Economics.
- Christopher S. Adam & David L. Bevan, 2006. "Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries," World Bank Economic Review, World Bank Group, vol. 20(2), pages 261-290.
- Collier, Paul & Gunning, Jan Willem, 1992. "Aid and Exchange Rate Adjustment in African Trade Liberalisations," Economic Journal, Royal Economic Society, vol. 102(413), pages 925-39, July.
- White, Howard & Wignaraja, Ganeshan, 1992. "Exchange rates, trade liberalization and aid: The Sri Lankan experience," World Development, Elsevier, vol. 20(10), pages 1471-1480, October.
- Mwanza Nkusu, 2004. "Aid and the Dutch Disease in Low-Income Countries; Informed Diagnoses for Prudent Prognoses," IMF Working Papers 04/49, International Monetary Fund.
- Catherine A. Pattillo & Stephen A. O'Connell & Christopher Adam & Edward F. Buffie, 2004.
"Exchange Rate Policy and the Management of official and Private Capital Flows in Africa,"
IMF Working Papers
04/216, International Monetary Fund.
- Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Pattillo, 2004. "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 126-160, June.
- Geda, Alemayehu, 2006. "The Structure and Performance of Ethiopia's Financial Sector in the Pre- and Post-Reform Period with a Special Focus on Banking," Working Paper Series RP2006/112, World Institute for Development Economic Research (UNU-WIDER).
- Younger, Stephen D., 1992. "Aid and the Dutch disease: Macroeconomic management when everybody loves you," World Development, Elsevier, vol. 20(11), pages 1587-1597, November.
- Yves Bourdet & Hans Falck, 2006. "Emigrants' remittances and Dutch Disease in Cape Verde," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 267-284.
- Yano, M. & Nugent, J.B. & Lay, R.N., 1995.
"Aid, Non-Traded Goods and the Transfer Paradox in Small Countries,"
9515, Southern California - Department of Economics.
- Jeffrey B. Nugent & Makoto Yano, 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries," American Economic Review, American Economic Association, vol. 89(3), pages 431-449, June.
- Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, March.
- Philip Hans Franses & Bart Hobijn, 1997. "Critical values for unit root tests in seasonal time series," Journal of Applied Statistics, Taylor & Francis Journals, vol. 24(1), pages 25-48.
- repec:hal:journl:hal-00287137 is not listed on IDEAS
- Elbadawi, Ibrahim A, 1999. "External Aid: Help or Hindrance to Export Orientation in Africa?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(4), pages 578-616, December.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Emmanuel K. K. Lartey, 2007. "Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 16(3), pages 337-357.
- Michaely, Michael, 1981. "Foreign aid, economic structure, and dependence," Journal of Development Economics, Elsevier, vol. 9(3), pages 313-330, December.
- Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
- Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease; Is there a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund.
- Nyoni, Timothy S., 1998. "Foreign Aid and Economic Performance in Tanzania," World Development, Elsevier, vol. 26(7), pages 1235-1240, July.
- repec:cup:cbooks:9780521633659 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:sus:susewp:1110. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Russell Eke)
If references are entirely missing, you can add them using this form.