Abstract:
The aim of this study was to modeling the impacts of macroeconomic variables shocks on Trade
Balance in Ethiopia using a Multivariate Time Series Approach. Trade balance is the value of
exported goods minus the value of imported goods. For instance Ethiopia is running with a
negative trade balance for the several decades implying that export of the country could not cover
the import expenditure. The main objective of this study was to examine the short-run and long-run
effect of real effective exchange rate, broad money supply, gross domestic product and foreign
direct investment on the current change of trade balance in the case of Ethiopia. A time series data
was taken from National Bank of Ethiopia and World Bank data base on yearly basis from 1991 to
2020. Each of the study variables where checked for stationary and existence of co-integrating
relation and found two co-integrating relation exists. Thus, a vector error correction model was
applied to investigate the short-run and long-run effect of the exogenous variables shocks on the
current change of trade balance. The result of the analysis shows that the change in each of real
effective exchange rate, gross domestic product and foreign direct investment have a significant
short-run and long-run effect shock on the current change of trade balance either in their first lag
and second lag. On the other hand broad money supply has insignificant short-run and long-run
effect shock on the current change of trade balance either in their first lag and second lag. From
the result of forecast variation contribution in trade balance is itself in short horizon and decrease
in the long horizon.
