THE DYNAMIC EFFECT OF MONETARY POLICY ON ETHIOPIAN ECONOMY

Abstract

Various studies found out contending findings of regarding the effect of monetary policy on economic growth of across a country. In many developing countries study result showed that monetary policy has positive, some indicate negative and other found to be uncertainty. Therefore, the purpose of this study is to examine the extent of impact of monetary policy variables on economic growth in Ethiopia.To examine the effect of monetary policy in Ethiopia, secondary time series data were collected from national bank of Ethiopia and mofec starting 1970 EC to2011EC. To analyze the data both descriptive statistics and econometrics model such as using Autoregressive Distributive lag (ARDL)model were applied.The main findings of the model attested that in the long run money supply, and unemployment rate have positively affected real GDP growth rate, while domestic credit, interest rate and inflation have negatively affected the growth. Besides, the ECM model result of short run shows that money supply has statistically significant negative effect on the real gross domestic product growth. The unemployment rate, domestic credit, interest rate and inflation have positive effect on growth in the short run.Even though Ethiopia has registered almost double digit growth rate for more than a decade, unemployment rate has been increasing. As a result, the net increment of unemployment and Economic growth rates have positive relationship both in the short and the long-runs, which is against existing theory. This is because in Ethiopia there are many unskilled and unemployed youth who migrate from rural to urban could not be absorbed in the industries. Hence, though there is fast economic growth in Ethiopia for the last one decade, unemployment rate is increased along with real GDP growth.