Testing Validity of Marshal Lerner Condition in the Ethiopian Economy

Abstract

Devaluation of a currency has an ambiguous effect on economic growth of a country. In this paper, I analyzed the effects of devaluation on trade balance and weather the Marshall-Learner Condition is valid or not in the Ethiopian Economy using time series data from 1980 to 2015. In order to do so, import and export equation where estimated separately with respective independent variables. The finding of the study showed that devaluation has insignificant impact on both import and export of Ethiopia and the Marshall Lerner condition does not hold because the sum of import and export elasticity is less one in absolute value. Co-integration techniques are also used to see the long run relation between the variables of both the export and import equations. The results indicated that there is long run relationship between the variables of the export equation such as export, exchange rate and world income and the import equation such as import, exchange rate and domestic national income.