Effects of Monetary Policy on International Trade in Ethiopia

Academic Paper from the year 2021 in the subject Economics - Monetary theory and policy, grade: A, , language: English, abstract: This study examined the effect of monetary policies on Total Trade (proxy of international trade) in Ethiopia between 1989 to 2019.International trade was captured using Total Trade (proxy of international trade) while the independent variables that described the various macroeconomic policies in Ethiopia were money supply, exchange rate, real lending rate and inflation rate. Time series data on the variables of the study was gotten from Annual reports of the National Bank of Ethiopia (NBE) from 1989-2019. The secondary data was analyzed using E-views 9.0 software. A model was formulated for the study. The Augmented Dickey Fuller (ADF) stationary test showed that the variables in the study were stable at both levels and at first difference. The regression of the independent variables with Total Trade (proxy of international trade) showed the existence of a long run relationship. Using the Autoregressive Distribute Model (ARDL), the empirical results money supply exerts a significant positive effect on Total Trade (proxy of international trade) in the long run while real lending rate and inflation rate exerts a significant negative effect on Total Trade (proxy of international trade) in the long run and Total Trade (proxy of international trade) one period lag of the variable significantly affects the Total Trade (proxy of international trade) in the short run. LagTT or D(LTT(-1)), a one percent increase in expectation push Total Trade (proxy of international trade) by 51% in short run. This result is similar to the theory of adaptive expectations, they states that individuals will form future expectations based on past events. The study thus concluded that the monetary policy channels through which Total Trade (proxy of international trade) in Ethiopia can be influenced are money supply, lending rate and inflation rate. The study testes all the diagnostic test like serial correlation, Normality, heteroschedasticity and stability. The estimate of the speed of adjustment coefficient found in this study indicates that about a 75% of the variation in the Total Trade (proxy of international trade) from its equilibrium level is corrected within a year.