The Dynamic Effect Of Monetary Policy Shock On The Ethiopian Economic Growth

Abstract

This study examined the effect of monetary policy shock on economic growth in Ethiopia using Auto regressive distributive lag Model approach on annual data for the period of 1991-2021 data taken from National Bank of Ethiopia. The study employed the annual time series data from 1991- 2021. The study adopted an Autoregressive Distributed Lag (ARDL) approach to answer the ob jectives set out in the study. Unit root test revealed that real interest rate, exchange rate and Bank reserve were stationary at level. While log of real gross domestic product, log of money supply, and Domestic credit were stationary after first differencing in both at constant and at trend. The results of ARDL bounds test for co-integration showed existence of long run relationship among the series during the study period. In Long run the response of Domestic credit, and Bank Reserve is positive shock on economic growth. While, the response of Money supply, exchange rate and interest rate have negative shock on economic growth which indicate that in the long run these economic variables resulted in Domestic price to increase and deteriorate real economic growth. In short run both Domestic credit and Bank Reserve, have negative shock and other variables Interest Rate and Bank reserve have significant positive shock on economic growth in Ethiopia at 5% as well as money supply is significant at 10% and positively affect economic growth in Ethiopia in the study period. The Error correction model (ECM) test showed that about 98% of short run disequilibrium was adjusted every year. The test of causality showed that there was causality be tween real gross domestic product with domestic credit and interest rate at 5% level of significant and causality with money supply, exchange rate and Bank reserve at 10% level of significant. The study revealed that the monetary policy instrument (Domestic credit, interest rate, and money sup ply) promotes economic growth. However, exchange rate does not promote Ethiopian economy which requires further revision. Thus, to promote economic growth, national banks of Ethiopia should be committed to the mission of price stability to accelerate the real economic growth