The Behaviour of Money Supply in Ethiopia (1964/65-2003/04)

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This paper has aimed to examine three important things: i) to identify the determinants of money supply in Ethiopia over the period 1964/65QI-2003/04Q4, ii) to review the stability of the money-multiplier so as to respond to the question of whether money supply can be controlled and be correctly predicted using the money multiplier approach. And iii) to see the effectiveness of monetary policy after the reform period of 1992 with regards to given targets. Based on these objectives, the study used the money-multiplier approach of money supply determination and found that money supply is related significantly with base money through the money-multiplier. However, the money-multiplier is found unstable and moved inversely with the movements of base money indicating that the control of money supply and correctly predicting its changes is questionable. Also from actual versus target comparison, the target for domestic credit to the government was not able to be achieved although money supply and total domestic credit were near their respective targets suggesting that monetary policy wasn't able to achieve its objectives effectively. After identifying the inappropriateness of the money multiplier model of money supply determination, the paper used the disaggregated counter parts approach of money supply determination and found that money supply is determined by nominal income, price level, foreign exchange receipts, lending interest rate, nominal exchange rate and overall domestic credit expansion. Moreover, money supply is found to be influenced by seasonal fluctuations and political instabilities. This indicates that factors such as foreign exchange receipts might limit the control monetary authorities have over money supply. Especially, the nonexistence of a well developed secondary market and the non-monetization of the economy might impose serious constraints on the implementation of monetary policy in Ethiopia. Key words: Money supply, Money-Multiplier, Asset Counterparts, Stability, Ethiopia



Money Supply, Money-Multiplier