The behavior of the real effective exchange rate of Ethiopia: does misalignment exist?

ABSTRACT

This study examined the main drivers of real effective exchange rate (REER) misalignment for Ethiopia over the period 1970–2020. Based on the behavioural equilibrium exchange rate concept, the study used the dynamic OLS and Markov regime switching model (MSM). The cointegration results revealed that the REER appreciates for an increase in relative productivity, government spending and net remittances, but it depreciates for more trade openness and real investment in the long-run. The MSM results also suggested a distinct misalignment episodes of under- and overvaluation with significant variability for the Ethiopia’s Birr over the study period.

KEYWORDS:

• Real exchange rate
• misalignment
• DOLS
• Markov switching model
• Ethiopia

JEL CLASSIFICATION:

• F31
• O24

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

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Getaneh Mihret Ayele

Getaneh Mihret Ayele is a faculty member at College of Business and Economics, Bahir Dar University, Ethiopia. His research interests are in the fields of international and macroeconomics, with a specific focus on the balance of payments, exchange rates, foreign trade, and financial sector development.