The effect of exchange rates on economic growth in Ethiopia

Table of Contents

CHAPTER ONE: INTRODUCTION

1.1. Background of the Study

1.2. Statement of the Problem

1.3 Objective of the Study

1.4 Basic Research Questions

1.5 Hypothesis

1.6 Significance of the Study

1.7 Scope and Limitation of the Study

1.8 Organization of the study

CHAPTER TWO: LITERATURE REVIEW

2.1 Brief discussion of exchange rate in Ethiop

2.1.1 Definition

2.1.2 Exchange rate policy in Ethiopia

2.1.3 Exchange rates and economic growth in Ethiopia

2.1.4 Real and nominal effective exchange rates

2.2 Theoretical literature review

2.2.1 The traditional views of Exchange rate

2.2.2 The structuralist views of Exchange rate

2.2.3 The Balassa-Samuelson Hypothesis

2.2.4 The export-led growth hypothesis

2.3 Empirical literature review

CHAPTER THREE: DATA AND METHODOLOGY

3.1 Introduction

3.2 Research Design

3.3 Data type and sources

3.4 Method of data analysis

3.5 Model specification

3.6 Unit root tests

3.7 Johansen cointagration test and VECM

3.8 Impulse response and variance decomposition analysis

3.9 Diagnostic checks

CHAPTER FOUR: EMPIRICAL ANALYSIS AND DISCUSSION

4.1 Introduction

4.2 Descriptive data analysis

4.2.1 Real effective exchange rate and economic growth

4.3 Tests of the time series data

4.3.1 Stationarity tests

4.4 Test for cointegration

4.5 Determination of optimal lag length

4.6Estimation results and interpretation

4.6.1Vector Error Correction Model

4.7 Diagnostic tests on the residuals of VECM

4.8 Impulse response and variance decomposition analysis

CHAPTERFIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of the Findings and Conclusions

5.2 Policy implications

Research Objectives and Key Topics

The primary objective of this thesis is to empirically investigate the long-run and short-run effects of exchange rate adjustments on economic growth in Ethiopia, utilizing annual time series data covering the period from 1985/86 to 2014/15.

• The impact of real effective exchange rates on national economic performance.
• Evaluation of government fiscal policy and expenditure relative to GDP growth.
• Analysis of the relationship between trade openness, broad money supply, and economic output.
• Application of the Vector Error Correction Model (VECM) for macroeconomic forecasting.
• Strategic assessment of Ethiopia's shift from an agricultural-led to an industrial-led economy.

Excerpt from the Book

Summary of Chapters

CHAPTER ONE: INTRODUCTION: Introduces the background, problem statement, objectives, and significance of studying the effects of exchange rate adjustments on the Ethiopian economy.

CHAPTER TWO: LITERATURE REVIEW: Examines theoretical frameworks, including traditional and structuralist views of exchange rates, the Balassa-Samuelson Hypothesis, and empirical findings from other developing countries.

CHAPTER THREE: DATA AND METHODOLOGY: Details the research design, data sources, model specification, and econometric methods like unit root tests and the Vector Error Correction Model.

CHAPTER FOUR: EMPIRICAL ANALYSIS AND DISCUSSION: Presents descriptive statistics, stationarity tests, cointegration results, and the econometric interpretation of the variables' impacts on economic growth.

CHAPTERFIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS: Synthesizes the empirical findings, concludes on the long-term impact of exchange rate policies, and provides policy recommendations for Ethiopia's economic transformation.

Keywords

Exchange Rates, Economic Growth, Ethiopia, Devaluation, Real Effective Exchange Rate, VECM, Trade Openness, Gross Domestic Product, Macroeconomic Policy, Structural Adjustment, Capital Accumulation, Export-led Growth, Monetary Policy, Fiscal Policy, Inflation.

Frequently Asked Questions

What is the primary focus of this research?

The research investigates the influence of exchange rate movements on Ethiopia's economic growth using historical time series data.

Which economic theories are analyzed in the work?

The study evaluates the traditional view of currency devaluation, the structuralist approach, the Balassa-Samuelson Hypothesis, and the export-led growth hypothesis.

What is the core research question?

The study primarily asks whether exchange rate adjustments have a significant long-run effect on economic growth in Ethiopia.

Which methodology is employed for empirical analysis?

The author uses a quantitative research design, specifically applying the Vector Error Correction Model (VECM) to estimate long-run and short-run relationships.

What is covered in the main body of the text?

The main body covers the literature review, the derivation of the econometric model, the diagnostic testing of the data, and the empirical results regarding variables like GDP, inflation, and trade openness.

Which keywords best describe this study?

Key terms include Exchange Rates, Economic Growth, Ethiopia, Devaluation, VECM, and Trade Openness.

Does currency depreciation promote growth in Ethiopia according to the results?

The results suggest that, contrary to traditional expectations, devaluation is contractionary in the long run for Ethiopia, implying that exchange rate stability is crucial.

What role does government final consumption expenditure play?

The study finds a significant negative long-run relationship between government final consumption expenditure and economic growth in Ethiopia.