Exchange Rate and Trade Balance in Ethiopia

The paper analyzed the relationship between exchange rate and trade balance of Ethiopia employing cointegration technique using annual data from 1974/75 to 2011/12. It has conducted Zivot-Andrews and Perron unit root test with structural break and Gregory-Hansen structural break cointegration test besides the convectional unit root and cointegration tests. The coingeration tests revealed that there is long run relationship among variables, however, estimation results indicated that the sign of real effective exchange rate is positive and insignificant which confirms against Marshal-Learner condition, only currency devaluation may not improve trade balance of Ethiopia unless other simultaneous policies taken.