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

Using yearly time series data from 1974 to 2020, this study seeks to explore the influence of actual (real) exchange rates on economic development in Ethiopia. The real effective exchange rate, government final consumption spending, gross fixed capital creation, broad money supply, and trade openness were used as explanatory variables in this study. The study used the endogenous growth model proposed by Solow (1956). They look at descriptive as well as empirical methodologies. Under the descriptive analysis section, the development of public real exchange and its components, as well as the economy's growth pattern, were discussed. The Johansson test for co integration and the Vector Error Correction Mechanism were used to study the long and short run connection between the dependent variables GDP and components of real exchange rate, respectively. The stationery of the statistics was analysed into ADF and PP assessments before estimating the longer term model, and the outcome indicated that all aspects are of order one. The CO-integration test was then performed, and it was discovered that there is only one co-integrating equation among variables. Trade openness and government capital generation have little influence on economic development, according to the long run test. Exports and a large money supply both have a favourable and considerable impact on GDP growth. According to the examination, Ethiopian government final consumption has a negative impact on GDP growth (increase). The ultimate result of the VEC model in the short term indicated that trade openness and a broad money supply had a favourable and considerable impact on GDP growth. The examiner recommends that the Ethiopian government shift its spending to productivity-oriented sectors and ensure the proper implementation of price range allocations, promoting import substitution strategies through domestic industry subsidies and discouraging import substitution strategies through domestic industry subsidies.

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