Abstract:
This study has estimated stable long run and dynamic money demand equations for
Ethiopia. The objective of monetary policy in Least Developing Countries is usually
related to money and credit control, price stabilization and economic growth. Many
Least Developing Countries considered, price stability as the most important objective of
monetary policies and it is important to testing the stability of parameter of money
demand function indicate the effectiveness of the conduct of monetary policy. The
research to be conducted therefore is to investigate the determinants of money demand.
Secondary source of data from 1979 to 2020 was used. Based on the data, an error
correction model (ECM) was applied to estimate the money demand function in Ethiopia.
From the study it is found that, money demand is positively related with real GDP and it
is negatively related with real interest rate and real effective exchange rate. Therefore,
the study recommends that the determinant of money demand which is real GDP, real
money balance, inflation rate and real effective exchange rate should be first stabilized in
order to have appropriate circulation of money and to encourage sustainable stability of
money demand
