The Impact of Export Volatility on the Growth of Ethiopia: A GARCH Model Approach

Abstract

Export volatility is a hot issue in any developing country's economic growth. This study examines export volatility and its long-term impact on Ethiopia's economic growth. Employing quarterly data from 1991 to 2014, the study uses the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model and Extended Cobb-Douglas Production Growth Models. According to the estimation result of the GARCH (1, 1) model, the volatility index negatively affects Ethiopia's economic growth. Moreover, the previous day's volatility of export price and volume can influence the current day's volatility of both export price and volume. The results from the extended Cobb-Douglas production model show that both the export price and volume volatility indexes negatively impact long-run economic growth. As a solution, the study suggested that the country should switch from making low-quality goods to making high-quality goods and exporting a more comprehensive range of goods with a competitive edge. Moreover, there should be price-based stabilization through price-oriented diversification and replacing primary products with industrial exports is fundamental to the realization of sustained economic growth in Ethiopia.