ANALYSIS OF THE DETERMINANTS OF RELATIVE TRADE BALANCE IN ETHIOPIA: ECONOMETRIC TIME SERIES APPLICATION

This study aims to analysis the determinants of trade balance in Ethiopia using econometric time series methods. Relative Trade Balance (RTB), real effective exchange rate, money supply and real income were selected as variables for this purpose. 1998 - 2018 yearly data for Ethiopia's economy were used for analysis. The results of the econometric test demonstrate that real effective exchange rate is the variable with greatest determinant of trade balance positively in Ethiopia. But Money supply and real income are negatively affecting the trade balance. Using the autoregressive distributed lag (ARDL) approach with error-correction modeling (ECM) cointegration, the popular hypothesis of J-curve effect is tested with yearly data from 1998 - 2018. The modeling results reject the J-curve effect in the short-run but show a long-lasting positive effect of Ethiopia's depreciation in trade balance. As such it is suggested that Ethiopia should maintain a good relationship with other partner countries and a stable exchange rate, money supply and real income for long-run trade balance and economic growth at an appropriate level or rate.