Macroeconomic and distributional impacts of exchange rate devaluation in Ethiopia: A computable general equilibrium approach

Abstract

In this paper, we simulate the macroeconomic and distributional impacts of exchange rate devaluation in Ethiopia using a dynamic single country Computable General Equilibrium model. We find that although devaluation helps exports to be more competitive in the short term, thereby increasing export earnings, over the long term the policy is found to have a contractionary and inflationary impact in a developing country like Ethiopia. It also comes at the cost of a reduction in household welfare and investment. In terms of distributional impact, the policy simulation result suggests that devaluation disproportionately affects urban households than rural households in Ethiopia given the nature of their consumption basket.

Abstract

Economics; Devaluation; International trade; Exchange rate policy; Monetary policy; Developing countries