Devaluation and Its Impact on Ethiopian Economy

Abstract

The aim of this thesis is to test the validity of Marshal Lerner condition for Ethiopianeconomy. With this aim, import and export equations are estimated by using the OLSmethod. Estimation results show that there is a positive relationship between exchangerate and export and devaluation will lead the nation‟s export to increase in the shortrun nevertheless, devaluation does not decrease import. Since the import coefficient isnot statistically significant, the Marshall Lerner condition does not hold in Ethiopianeconomy even if the sum of the absolute value of elasticity of import and export isgreater than 1.Cointegration techniques are also used to see the long run relationbetween the variables of both the export and import equations. The results indicatedthat there is no long run relation between the variables of the export equation such asexport, exchange rate and world income and the import equation such as import,exchange rate and domestic national income.