Advanced Research in Economics and Business Strategy Journal
Volume 7, Numéro 1, Pages 05-20
2026-06-30
The Rigidity Trap: Commodity Booms, Administrative Decoupling, And Exchange Rate Collapse In Ethiopia
Authors : Yihuan Lin . Choo Wei Chong . Keng Yap Ng . Juan Zhang . Youyuan Wu .
Abstract
This study investigates why Ethiopia’s currency remained stable during a global coffee price boom only to undergo a sharp devaluation in 2024. It examines how governance structures disrupt the transmission of commodity terms-of-trade shocks to the exchange rate. Employing a comparative econometric framework with daily data (2020-2025), we contrast Ethiopia with a market-determined control case (Brazil) using Granger Causality tests and Recursive Residual Analysis. The results reveal a statistically insignificant transmission for Ethiopia, confirming a policy-induced decoupling absent in Brazil. Critically, we identify a structural break on August 1, 2024, which quantitatively marks the rupture of the managed regime and the turbulent onset of liberalization. This indicates that prior stability was an artifact of administrative management that accumulated severe imbalances. The study concludes that rigid exchange rate management in weak institutional settings creates a “rigidity trap,” where suppressing volatility stores systemic risk and precipitates an abrupt and costly transition. These findings advance the political economy of exchange rates by linking governance to crisis dynamics and warn policymakers that administratively maintained stability without building institutional resilience risks severe adjustment episodes.
Keywords
Political Economy ; Commodity Price Transmission ; Structural Breaks ; Ethiopia ; Post-New Public Management
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