The Impact of Devaluation on Trade Balance : The case of Ethiopia

Abstract

The purpose of this paper is to investigate the impact of devaluation on trade balance of Ethiopia. The demand for export and import function of the country from the period 1980 to 2003 is estimated. The demand for export is estimated using the ordinary least square (OLS) model and the demand for import is estimated using instrumental variable estimation model. Since the issue of nonstationarity in time series data often causes a spurious regression problem, the cointegration approach and error correction model is used in the paper to solve the problem.