Exchange Rate Transmission In the case of Ethiopia
|Author:||Mgr. Muhammed Siraj MUHAMMED|
|Year:||2012 - summer|
|Leaders:|| doc. Mgr. Tomáš Holub Ph.D.
|Work type:|| Masters
|Awards and prizes:|
|Abstract:||This study examines the pass through of exchange rate shocks to Ethiopian domestic
inflation. The baseline analysis carried out with the VAR/SVAR model, using four
endogenous and three exogenous variables, employing quarterly data for the period
1993Q1 to 2011Q4. The pass through effect is quantified by means of impulse response.
The finding of the full sample estimate shows that, although statistically insignificant, the
ERPT to consumer prices is fairly large, but incomplete. Moreover, a sub sample analysis
reveals that although the pass through for the two periods has been substantially large and
complete, it is higher for the relatively low inflation periods (1993Q1-2002Q4) than for
the high inflation period (2003Q1-2011Q4); which contradicts with other empirical
studies. On the other hand, the variance decomposition function results show that the
external factors such as world oil price fluctuations and foreign prices have a greater role
in explaining the domestic inflation for the period 2003Q1-2011Q4 than for the period
1993Q1-2002Q4. The high share of imported goods to the total CPI, the market structure
of the economy and the openness of the economy to the international market are the
determining factors of the pass through. The supply side shocks, the money supply
growth, shocks of world oil price and the foreign prices have a significant contribution to
the domestic inflation of Ethiopia.