Macroeconomic and distributional impacts of exchange rate devaluation in Ethiopia: A computable general equilibrium approach

Abstract

In this paper, we simulate the macroeconomic and distributional impacts of exchange rate devaluation in Ethiopia using a dynamic single country Computable General Equilibrium model. We find that although devaluation helps exports to be more competitive in the short term, thereby increasing export earnings, over the long term the policy is found to have a contractionary and inflationary impact in a developing country like Ethiopia. It also comes at the cost of a reduction in household welfare and investment. In terms of distributional impact, the policy simulation result suggests that devaluation disproportionately affects urban households than rural households in Ethiopia given the nature of their consumption basket.

Asymmetric impact of real exchange rate on inflation in Ethiopia: a non-linear ARDL approach

“…The same results found by (Laryea & Sumaila, 2001;Loening et al, 2009) indicated that the exchange rate has a positive impact on inflation. Another study by Woldie and Siddig (2019) showed that in the long-run devaluation of the exchange rate has an inflationary impact and contrary, Ambachew et al (2012) indicated that the depreciation of exchange rate decreases inflation. Similarly, Nigusse et al (2019) in their study proved devaluation reduces inflation while appreciation of real effective exchange rate triggers inflation in in Ethiopia.…”

“…Another study by Rashid (2010) linked the sharp rise in domestic inflation to general demand, apart from a few exceptional cases between 2007-08, when cereal production was much lower than official agricultural statistics. Besides the supply and demand factors, other factors such as money supply, high government spending, real interest and shocks in key economic sectors such as agriculture (Bane, 2018), devaluation of Ethiopia's birr (Woldie & Siddig, 2019) were identified as the sources of inflation in Ethiopia. Most importantly, Durevall et al (2013), concluded that inflation in Ethiopia is strongly related to food inflation.…”

Monetary, fiscal, and structural drivers of inflation in Ethiopia: new empirical evidence from time series analysis

“…3 Cited in Agénor and Montiel (2015, p. 111), which provides an elaborate discussion on the topic. 4 See, among others, Woldie and Siddig (2019) for evidence on the negative (contractionary and inflationary) effects of exchange rate devaluation in Ethiopia. 5 The generation of structuralist models of inflation of the 1980 s considers inflation as the outcome of conflict (or bargaining) between workers and capitalists over the distribution of income between wages and profits (Cardoso, 1981;Taylor, 1983;Taylor, 1991).…”

“…4 4 See, among others, Woldie and Siddig (2019) for evidence on the negative (contractionary and inflationary) effects of exchange rate devaluation in Ethiopia. …”

The Short-Run and Long-Run Effects of Central Bank Rate on Exchange Rate Volatility in Indonesia

“…Therefore, the Central Bank in developing countries actively uses monetary policy to stabilise the exchange rate and avoid high volatility [10]. Exchange rate volatility is defined as large fluctuations around the balance value or short-term fluctuations around the exchange rate's long-term trends [11][12][13]. Also, exchange rate volatility is associated with unpredictability in the economy's relative prices.…”