Abstract
ABSTRACT This study examined the main drivers of real effective exchange rate (REER) misalignment for Ethiopia over the period 1970–2020. Based on the behavioural equilibrium exchange rate concept, the study used the dynamic OLS and Markov regime switching model (MSM). The cointegration results revealed that the REER appreciates for an increase in relative productivity, government spending and net remittances, but it depreciates for more trade openness and real investment in the long-run. The MSM results also suggested a distinct misalignment episodes of under- and overvaluation with significant variability for the Ethiopia’s Birr over the study period.
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