The Effects of Shocks to Ethiopian Monetary Policy on Price and Output: SVAR Approach
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2014-06
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Addis Ababa University
Abstract
The Effects of Shocks to Ethiopian Monetary Policy on Price and Output: SVAR Approach Anteneh Geremew Addis Ababa University, June 2014 The main objective of this paper was to model and investigate the effect of shocks on Ethiopian monetary policy in to output and price using SVAR methodology. Using quarterly data 1995Q3 to 2011/12Q4, SVAR model is developed. Both the domestic (GDP, CPI, M0, T-bill rate) and foreign variables (OPI and WCPI) were used to investigate the Ethiopian monetary policy framework. I have imposed a contemporaneous restriction based on economic theory in order to provide some economic structure to Ethiopia SVAR. The results of innovation accounting analyses, generated from the SVAR model suggested that a positive shock to reserve money increased output significantly with a considerable lag spans one quarter, while price respond to a positive shock to reserve money negatively for a period of one and half and after this period it was increased and sustained for long periods. A notable difference with the monetary policy variables (reserve money and T-bill rate) shock effect on output and price were obtained. I obtained that the variability of price and output due to shock to reserve money was more explained than T-bill rate shock in the short term as well as the long term horizons. Finally, based on the findings I have drawn my recommendations. The finding indicated that in the short term and long term variability of price and output were more explained due to shock to reserve money than T-bill rate shock, therefore, the NBE should be ensure that reserve money and interest policy are consistent with each other and further studies should be needed to identified different monetary transmission mechanisms or cannels in Ethiopia
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Effect of shocks on Ethiopian monetary policy