Exchange Rate Risk Effect On International Trade The Case Of Ethiopia

This study investigates the effect of foreign exchange rate risk on international trade performance of Ethiopia. It has used Trade Openness as a measure of international trade performance and Standard Deviation of the Real Effective Exchange Rate as a proxy for exchange rate volatility. The study applied Autoregressive Distributive Lag (ARDL) model to investigate the long run and short run relationship between exchange rate risk and international trade performance. To conduct the regression analysis, Gross Domestic Product (GDP), Real Effective Exchange Rate (REER), Terms of Trade (TOT) were controlled. The research relied on secondary data obtained from the National Bank of Ethiopia. The data series covered a period of sixteen years, 2002/03-2017/18. The analysis result indicates that exchange rate risk negatively and significantly affects the international trade performance of Ethiopia. The findings suggest that in addition to the monetary policy interventions, more emphasis should be put on the quality and diversification of tradable commodities.

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