Exchange Market Pressure And Monetary Policy In Ethiopia

In this paper, the study examined the foreign exchange market and try to extract anrnexchange market pressure and an intervention index for Ethiopia by following the Weymarkrn(1995) approach to evaluate the National Bank of Ethiopia exchange rate policy duringrn2006:Q1 to2017:Q4 using the data obtained from NBE, BLS, IMF and IFS. To address thernproblem of endogenity, the study employed the popular Two-Stage Least Squares (2SLS) tornmeasure the exchange market pressure and developing intervention index. The exchangernmarket pressure’s mean value of 0.002 provides evidence that depreciating pressure remainedrndominant over the entire sample period. However the minimum mean value suggest thatrnNBE should further depreciate the exchange rate or increase the foreign currency reserve.rnAlso, the mean value of the intervention index is 0.31, indicating that the foreign exchangernreserve and exchange rate changes absorbed thirty one and sixty nine percent of the pressure,rnrespectively. Comparing with other countries, NBE’s policy towards the pressure is morerndependent on exchange rate. Otherwise the results of the paper show that on an average therernwas a downward pressure on Ethiopia’s currency and the National Bank of Ethiopiarnpursued an active intervention policy. Specifically, as the intervention index shows, thernNational Bank of Ethiopia used both exchange rate and foreign exchange reserverninterventions for restoring the foreign exchange market to equilibrium levels, a policy knownrnas the managed float exchange rate regime which is consistent with the existing policy of thernNational Bank of Ethiopia.

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