Real exchange rate misalignment and economic growth: An empirical analysis for Ethiopia

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cg.authorship.typesCGIAR single centreen_US
cg.contributor.affiliationInternational Food Policy Research Instituteen_US
cg.contributor.donorCGIAR Trust Funden_US
cg.contributor.donorUnited States Agency for International Developmenten_US
cg.contributor.donorForeign, Commonwealth and Development Office, United Kingdomen_US
cg.contributor.donorEuropean Unionen_US
cg.contributor.initiativeNational Policies and Strategiesen_US
cg.coverage.countryEthiopiaen_US
cg.coverage.regionAfricaen_US
cg.coverage.regionEastern Africaen_US
cg.coverage.regionSub-Saharan Africaen_US
cg.creator.identifierAlemayehu Seyoum Taffesse: 0000-0001-8144-8998en_US
cg.howPublishedGrey Literatureen_US
cg.identifier.projectIFPRI - Development Strategies and Governance Uniten_US
cg.identifier.projectIFPRI - Ethiopia Strategy Support Programen_US
cg.identifier.publicationRankNot rankeden_US
cg.number163en_US
cg.placeWashington, DCen_US
cg.reviewStatusInternal Reviewen_US
cg.subject.impactAreaPoverty reduction, livelihoods and jobsen_US
dc.contributor.authorAlemnew, Teklebirhanen_US
dc.contributor.authorTaffesse, Alemayehu Seyoumen_US
dc.date.accessioned2025-01-29T20:25:20Zen_US
dc.date.available2025-01-29T20:25:20Zen_US
dc.identifier.urihttps://hdl.handle.net/10568/172441en_US
dc.titleReal exchange rate misalignment and economic growth: An empirical analysis for Ethiopiaen_US
dcterms.abstractIn both developing and developed economies, academic and policy discussions have consistently emphasized that achieving stable economic growth and maintaining internal and external balance require an exchange rate aligned with its long-term equilibrium value. This paper examines the impact of real exchange rate misalignment on Ethiopia's economic growth from 1980 to 2022. The study begins by estimating the equilibrium real exchange rate using the Behavioral Equilibrium Exchange Rate (BEER) approach to calculate the misalignments. It then analyzes the effects of these misalignments on economic growth using Vector Autoregressive (VAR) and Hansen's (2000) threshold regression model. The VAR and Impulse Response Function (IRF) analyses reveal that real exchange rate misalignments have an immediate positive impact on economic growth, which diminishes between the eighth and sixteenth years and stabilizes as a permanent long-term effect. The threshold regression results indicate that undervaluation of the Ethiopian Birr enhances economic growth up to a 13.95% deviation from the equilibrium real exchange rate, while overvaluation supports growth up to a 7.15% threshold. Beyond these limits, misalignments hinder growth. The study underscores the importance of avoiding excessive deviations from the equilibrium exchange rate to sustain economic growth. Furthermore, it highlights the need for consistent macroeconomic policies to minimize the gap between the actual and equilibrium real exchange rates. These findings emphasize the critical role of exchange rate policy in promoting sustainable economic development in Ethiopia.en_US
dcterms.accessRightsOpen Accessen_US
dcterms.audienceCGIARen_US
dcterms.bibliographicCitationAlemnew, Teklebirhan; and Taffesse, Alemayehu Seyoum. 2024. Real exchange rate misalignment and economic growth: An empirical analysis for Ethiopia. ESSP Working Paper 163. Washington, DC: International Food Policy Research Institute. https://hdl.handle.net/10568/172441en_US
dcterms.extent36 p.en_US
dcterms.isPartOfESSP Working Paperen_US
dcterms.issued2024-12-31en_US
dcterms.languageenen_US
dcterms.licenseCC-BY-4.0en_US
dcterms.publisherInternational Food Policy Research Instituteen_US
dcterms.subjecteconomic growthen_US
dcterms.subjectpoliciesen_US
dcterms.subjectexchange rateen_US
dcterms.typeWorking Paperen_US

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