Abstract:
This study investigated the effect of currency devaluation on economic growth in
Ethiopia. In order to generate the necessary data for this study, National Bank of
Ethiopia (NBE), world development indicators (WDI), World Bank (WB) annual
report were used for the period of 1989/90 from 2018/19. The autoregressive
distributed lags (ARDL) model is used for interpretation. Results from ARDL Error
Correction Model revealed export and broad money supply have significant and a
positive long run effect on economic growth, while foreign direct investment have a
negative long run effect on the economic growth of Ethiopia. However, real effect
exchange rate and inflation are insignificant effect on economic growth in the long
run. The ARDL error correction mechanism result indicates that short term changes
in economic growth may actually be sufficiently explained by currency devaluation
and other factors selected in the model. So, the hypothesis of birr devaluation has no
significant effect on economic growth in the long run cannot be rejected. The study
shows that in the short run currency devaluation leads to increase in output and may
be improves the balance of payments but in the long run the consequence of the
devaluation shows that the insignificant effects. From the ARDL regression results, it
was noted that undervaluation of the currency is contractionary in the long run and
expansionary in the short- run. Since currency is sensitive key element that can link
microeconomic and macroeconomic aspect of the economy, a little beat modification
on currency results in overall disturbance of the economy. So, in Ethiopia highly deep
investigation likes Marshal Lerner Condition for devaluation and looking other
countries economic condition is important before currency devaluation
