Abstract
The exchange rate is an important indicator of economic activity that policymakers use to formulate policies. This paper is based on fitting historical nominal exchange rate time series expressed in terms of past values of itself plus current and lagged values of error term using the Autoregressive Integrated Moving Average (ARIMA) model over the period 1971-2020, resulting in the model (2,1,1) to forecast the next 15 years. The projection's performance is assessed using data from the preceding fifty years sourced from World Bank, and the forecast indicates that domestic currency depreciation will become more prevalent in order to stimulate exports. Moreover, the ARDL model is used to examine the impact of exchange rate, import, export, and inflation rate on RGDP from 1977 to 2018. The unit root test (Augmented Dickey- Fuller test) was used to verify the integration order of the variables. The five variables are used in the cointegration analysis. The bounds test of cointegration was used in this work. The results showed that the F-statistics value is greater than the upper boundaries at all levels of significance, indicating that individual variables have a long-term relationship with RGDP. This led to the estimation of the Error Correction Model (ECM), in which 25.1 percent of the disequilibrium is adjusted annually to bring the system back into equilibrium. Furthermore, nominal exchange rate and import has positive contribution to RGDP while inflation has adverse effect on RGDP in the long-run. Besides, inflation has a negative impact to RGDP in the short run due to its lag period effects. Keywords : forecasting, ARIMA model, ARDL model DOI: 10.7176/EJBM/13-17-02 Publication date: September 30 th 2021
Highlights
The re-distribution of income in favour of profits and at the expense of wages, supposed to follow a devaluation, may depress economic activity because of the higher marginal propensity to consume of wage earners (Diaz Alejandro, 1963; Krugman, Taylor, 1978) and this theoretical foundation is substantiated by empirical findings of various scholars where exchange rate has adverse effect on economic growth since devaluation is likely to result in a higher domestic price level, aggregate demand and output may be reduced as a result of a negative real balance effect (Pigou effect) (Ahmad A. et al, 2018; Barguellil et al, 2018 ; Umaru and Davies, 2018)
The parameters employed in the study to analyze the impact of foreign exchange rate on economic growth are, Real Gross Domestic Product (RGDP) which is a proxy for economic growth, and independent variables that are included in this study are nominal exchange rate, the total value import of goods and services, the total value of export items and the inflation rate
Devaluation would involve key macroeconomic trade-offs including the higher cost of imported capital equipment and increase in external debt stock and servicing when expressed in local currency
Summary
The re-distribution of income in favour of profits and at the expense of wages, supposed to follow a devaluation, may depress economic activity because of the higher marginal propensity to consume of wage earners (Diaz Alejandro, 1963; Krugman, Taylor, 1978) and this theoretical foundation is substantiated by empirical findings of various scholars where exchange rate has adverse effect on economic growth since devaluation is likely to result in a higher domestic price level, aggregate demand and output may be reduced as a result of a negative real balance effect (Pigou effect) (Ahmad A. et al, 2018; Barguellil et al, 2018 ; Umaru and Davies, 2018) As a result, these theoretical and empirical divergences have yet to be harnessed, and development practitioners are in desperate need of an empirical investigation. Assessing the impact of foreign exchange rate on Ethiopia's economic growth
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
