MODELING THE IMPACT OF MACROECONOMIC VARIABLES SHOCKS ON ETHIOPIAN TRADE BALANCE: A MULTIVARIATE TIME SERIES APPROACH

Abstract

The aim of this study was to modeling the impacts of macroeconomic variables shocks on Trade Balance in Ethiopia using a Multivariate Time Series Approach. Trade balance is the value of exported goods minus the value of imported goods. For instance Ethiopia is running with a negative trade balance for the several decades implying that export of the country could not cover the import expenditure. The main objective of this study was to examine the short-run and long-run effect of real effective exchange rate, broad money supply, gross domestic product and foreign direct investment on the current change of trade balance in the case of Ethiopia. A time series data was taken from National Bank of Ethiopia and World Bank data base on yearly basis from 1991 to 2020. Each of the study variables where checked for stationary and existence of co-integrating relation and found two co-integrating relation exists. Thus, a vector error correction model was applied to investigate the short-run and long-run effect of the exogenous variables shocks on the current change of trade balance. The result of the analysis shows that the change in each of real effective exchange rate, gross domestic product and foreign direct investment have a significant short-run and long-run effect shock on the current change of trade balance either in their first lag and second lag. On the other hand broad money supply has insignificant short-run and long-run effect shock on the current change of trade balance either in their first lag and second lag. From the result of forecast variation contribution in trade balance is itself in short horizon and decrease in the long horizon.