This study estimates the demand for import under foreign exchange constraint for Ethiopia using a time series data for the period 1991/92-2019/20. Both the simple descriptive analysis and the Johansen’s co-integration approach are employed to see the impact of foreign exchange constraint on the import demand of the nation. The quantitative results from co-integration and error correction specifications show that imports of the country are sensitive to changes in foreign exchange reserves both in the long run and in the short run. The result of the study also indicates the existence of an underlying long-run stationary steady state relationship between import demand and relative import price index, real income and policy dummy in Ethiopia. Moreover, all the explanatory variables of interest i.e. foreign exchange constraints, relative import price index and real income, do significantly cause import demand in the short run. Lastly, the estimated Vector Error Correction Model of import is stable over the sample period that it can be used for a policy purpose. The lower short run income elasticity of import shows the room available for import substitution industrialization strategy in Ethiopia and the higher long run income elasticity provides an evidence in favor of product diversification.
Keywords: Co-integration, Imports, foreign exchange reserve and Trade liberalization
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