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.