stract\nThe paper attempted to analyze Trade volume in seven major agricultural products in Ethiopia. The data revealed\nin most cases the volume of export is less than volume of import. Trade balance and exchange rate based on impulse\nresponse function and the forecast error variance decompositions. The short run effect of devaluation can be captured\nby the impulse response functions. Impulse response results show that trade balance in Ethiopia after real depreciation\nof currency follows J-curve patter. More importantly the obtained estimates suggest that upon real depreciation in\nthe first three years trade balance deteriorates (ââ?¬Ë?short runââ?¬â?¢) and subsequently improves. The forecast error variance\ndecomposition for each variable reveals the proportion of the movement in this variable due to its own shocks versus\nthe shocks in other variables. Further information on the linkages between the trade balance and its determinants\ncan be obtained from variance decompositions, which measure the proportion of forecast error variance in a variable\nthat is explained by innovations (impulses) in itself and the other variables. Discussion was conducted on analyzing\ntrade balance variance decomposition over a period of 10 years. The variance decomposition of trade balance reveals\nthat changes in its own shock, trade balance is the predominant source of variation in the logarithm of trade balance.\nThe result showed own series shock of trade balance explain most of the forecast error variance of the series in both\nbased on VAR and VECM. The change in the real effective exchange rate represents the second source of variation\nin trade balance with a percentage of 1.4%, and 1.28% in the second and third year forecast horizons based on VAR\nrespectively. Finally, the results also prove the relative ineffectiveness of the industrial production index in affecting trade\nbalance in Ethiopia based on both in VAR and VECM.
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