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

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cg.authorship.typesCGIAR single centreen
cg.contributor.affiliationInternational Food Policy Research Instituteen
cg.contributor.donorCGIAR Trust Funden
cg.contributor.donorUnited States Agency for International Developmenten
cg.contributor.donorForeign, Commonwealth and Development Office, United Kingdomen
cg.contributor.donorEuropean Unionen
cg.contributor.initiativeNational Policies and Strategies
cg.coverage.countryEthiopia
cg.coverage.iso3166-alpha2ET
cg.coverage.regionAfrica
cg.coverage.regionEastern Africa
cg.coverage.regionSub-Saharan Africa
cg.creator.identifierAlemayehu Seyoum Taffesse: 0000-0001-8144-8998en
cg.howPublishedGrey Literatureen
cg.identifier.projectIFPRI - Development Strategies and Governance Uniten
cg.identifier.projectIFPRI - Ethiopia Strategy Support Programen
cg.identifier.publicationRankNot rankeden
cg.number163en
cg.placeWashington, DCen
cg.reviewStatusInternal Reviewen
cg.subject.impactAreaPoverty reduction, livelihoods and jobs
dc.contributor.authorAlemnew, Teklebirhanen
dc.contributor.authorTaffesse, Alemayehu Seyoumen
dc.date.accessioned2025-01-29T20:25:20Zen
dc.date.available2025-01-29T20:25:20Zen
dc.identifier.urihttps://hdl.handle.net/10568/172441
dc.titleReal exchange rate misalignment and economic growth: An empirical analysis for Ethiopiaen
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
dcterms.accessRightsOpen Access
dcterms.audienceCGIARen
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
dcterms.extent36 p.en
dcterms.isPartOfESSP Working Paperen
dcterms.issued2024-12-31en
dcterms.languageen
dcterms.licenseCC-BY-4.0
dcterms.publisherInternational Food Policy Research Instituteen
dcterms.subjecteconomic growthen
dcterms.subjectpoliciesen
dcterms.subjectexchange rateen
dcterms.typeWorking Paper

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