The effect of commodity price shock on the Ethiopian economy

PurposeThe main purpose of this study is to examine the effect of commodity price shock on the Ethiopian economy for the sample period of 1991 Q1–2016 Q1.Design/methodology/approachThe effect of commodity price shock is analyzed using Jorda's (2005) local projection method. The shock is, however, identified by applying short-run contemporaneous restrictions in a vector autoregressive model based on Cholesky decomposition.FindingsThe results signify that output is positively affected by the shock to the commodity price. In addition, domestic consumer price responds positively and significantly to world commodity price shock after the first quarter. The commodity price shock has also a positive effect, on impact, on money supply. Foreign exchange reserve increases significantly from the fourth quarter onwards and real effective exchange rate appreciates on impact, though insignificantly, in response to the increase in commodity price.Originality/valueThis paper adds to the limited available literature on the effect of commodity price shock for developing countries in general and the Ethiopian economy in particular.