Impacts of Devaluation on Macroeconomic Stability of Ethiopia: Case of 2017 Birr Devaluation.

Diana, Girum Amaha (2023) Impacts of Devaluation on Macroeconomic Stability of Ethiopia: Case of 2017 Birr Devaluation. Masters thesis, The Open University of Tanzania.

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Abstract

This study analyzes the Impact of Currency Devaluation on Macroeconomic stability in Ethiopia, with focus on the 2017 devaluation using secondary data between 1992 and 2021. Two Models were used, with Inflation and RGDP as dependent variables acting as proxies for macroeconomic stability in each model, while NEER, External Debt, M2, Government expenditure and a Devaluation dummy Variable were used as independent Variables in both models. ARDL regression was conducted for the Long run estimation of both models, and the short run Error Correction Model (ECM) was estimated for both models. The findings indicate that an official devaluation is deflationary and expansionary to the real economy in the short run, but inflationary and insignificant to real GDP in the long run. The granger causality test also confirmed that Devaluation Granger causes Inflation uni-directionally. Finally, the study recommends that devaluation should not be carried out before Enacting import minimization, export composition switching, debt reliance reduction, rule based monetary policy and fiscal austerity policy measures to mitigate the adverse effects of devaluation on macroeconomic stability. Keywords: Macroeconomic Stability, Devaluation, Birr, Ethiopia

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