The Effect of Shocks to Ethiopia’s Monetary Policy on Price and Output: SVAR Approach
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Date
2022-06
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A.A.U
Abstract
This study investigated the effect of Ethiopia’s monetary policy shocks on price and output using quarterly time series data over the period 2008Q1 to 2020Q4. Structural Vector Autoregressive (SVAR) model was used to this end. We built two SVAR models. Foreign variables were also included to account for the rest of the world economy. In the first model, we considered USA as a proxy for the rest of the world following literatures, and in the second model we assumed China as world’s economic representative basing our assumption on the strong economic linkage between China and Ethiopia. The study’s result generally indicates that domestic monetary policy instruments are more consistent with standard monetary theory and they have stronger impact on domestic economy in the second model than in the first model. In the first model, none of the domestic monetary policy instruments are effective in changing the output level, but monetary and exchange rate channels are effective in changing the price level. On the other hand, monetary and interest rate channels are potent in changing the output and price levels in the second model. Therefore, the monetary, the foreign exchange market and the interest rate channels have to be enhanced and monitored to design effective monetary policies. Specifically, in designing policy targeted at changing the output level, policymakers have to use monetary and interest rate channels making use of more China’s than USA’s variables as information set. In designing policy targeted at changing the price level, they have to use monetary and exchange rate channels making use of more USA’s than China’s variables in addition to world commodity price as information set.
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output, price, monetary policy, Ethiopia, USA, China