Determinants of Exchange Rate in Ethiopia: A Graphical Approach

Abstract

The question of exchange rate determination has been just in the core of academic debates. Even though many exchange rate determination models and their amendments have been developed, scholars/writers still cannot agree on which model best describes behavior of exchange rate. Exchange rate is an essential element of the macro- economic variables that needs to be address in Ethiopia since the Ethiopian birr consistently losing its value and it is necessary to know the factors affecting, in order to analysis the determinate factors, to see which of those possible factors need to be care to control the exchange rate. The objective of this paper was to analysis the relationship among the level of exchange rate in Ethiopia and selected main determinant factors argued in both flow and stock theory of exchange rate determination. The analysis was carried out by detail reviewing the prior researchers work on the area and using correlation and trend analysis for the 18 (2000-2017 G.C) year data obtained from National bank of Ethiopia Quarterly Bulletin.  The result shows that nominal exchange rate of Ethiopia relates positively with government spending, broad money supply, inflation level, economic growth, interest rate and negatively with term of trade balance and current account balance. Moreover, it revealed that, government spending; broad money supply and nominal interest rate are the major determinants than inflation, economic growth term of trade balance, and current account balance.  Indeed, it is concluded as there is some theoretical and empirical deviations on the result of this study, may be due to the effect of some other missed variables (gov’t intervention level, political risk, cultural sentiment. Keywords: Exchange rate, balance of payment theory, Monetary theory, Ethiopia DOI: 10.7176/IAGS/68-01 Publication date: July 31 st 2020