An Empirical Investigation of Exchange Rate Pass through to Consumer Price in Ethiopia (1981-2013)

Abstract

This research paper investigated the foreign exchange pass to domestic price in Ethiopia for the year 1981 to 2013 using Auto Regressive Distributed Lag (ARDL) cointegration procedure. The result of the paper shows that foreign exchange pass to domestic price is not significant. Broad money supply, budget deficit and world commodity price index are the main determinates of domestic consumer price in Ethiopia. The result of the paper has policy implication in that an insignificant exchange rate pass-through is thought to provide greater freedom for pursuing an independent monetary policy and facilitates inflation targeting. The research paper therefore, concluded that government can devalue birr as long as it solves the problem of current account deficit but devaluation as policy instrument to stabilize domestic price is not justified based on the result found by this study. However, monetary policy found to be important policy instrument in stabilizing domestic price in Ethiopia.

Keywords: Foreign exchange rate pass through, consumer price, ARDL cointegration.