Impact of Credit Shock on Output and Price in Case of Ethiopia: SVAR Approach
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Date
2014-06
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Addis Ababa University
Abstract
Using the Structural Vector Autoregression (SVAR) method, this paper analyses the impact of
domestic credit shock on Ethiopian economy for the period 1998 to 2013 using quarterly data.
Totally six variables are included in our VAR model, four from domestic economy and two from
external economy. A number of restrictions were imposed on the contemporaneous relationship of
variables to identify the unique dynamic response of inflation and output to the credit innovations.
As a result, these shocks were used to generate the structural impulse response and forecast error
variance decomposition functions for assessing the dynamic impacts of credit shock on country’s
real gross domestic product and CPI. The impulse response shows that positive credit shock affect
CPI positively for long period of time (about five year)and affect real GDP negatively at the
beginning (output puzzle) and then positively after third quarter. Whereas, variance decomposition
found that the own innovation of domestic variables, except domestic credit, has the highest
proportion both in short-term and long-term forecast error. Innovations of CPI take the highest
proportion in explaining forecast error of domestic credit relative to other endogenous variables.
Based on the find of the study policy implication forwarded are, taking into account the relative
impact of credit shock on output and price monetary policy can stimulate output and stabilize price
through instruments that affect credit of banking system. Key words: Ethiopia, Structural VAR, Domestic Credit, Output and Price
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Keywords
Ethiopia, Structural VAR, Domestic Credit, Output and Price