The goal of this research is to close lack of sufficient, contemporary and comprehensive studies on the topic under study and gain a better understanding of the relationship between monetary policy and Ethiopian inflation.
The paper is organized as follows. After this introduction, the following section reviews the relevant literature, both theoretical and empirical. After this review, the methodological framework is presented. A series of test are show to assess the sensibility of the model. The discussion of the results is presented. Finally, some concluding remarks are shown.
The monetary policy pursued by a country's Central Bank has a significant impact on the country's economic and financial status. It is commonly acknowledged that maintaining price stability through monetary policy can contribute to long-term growth. When the rate of inflation is low enough, consumers and companies do not have to consider it when making daily decisions, according to Christiano and Fitzgerald.
The method, through which a country's monetary authority manages the supply of money, frequently by targeting an interest rate in order to promote economic growth and stability, is known as monetary policy. It is essentially a set of actions performed by monetary authorities, usually the central bank, to control and regulate the supply of money to the public as well as the flow of credit in order to achieve preset macroeconomic objectives.
Its stated objective is to maintain relatively steady pricing and low unemployment. All methods of monetary policy, in reality, require changing the amount of base currency in circulation. Open market operations are the open sales and purchases of (government-issued) debt and credit instruments that change the liquidity of the base currency. The monetary authority's constant market operations influence the supply of currency, which has an impact on other market variables including short-term interest rates and the exchange rate.
Table of Contents
1 INTRODUCTION
2 LITRATURE REVIEW
2.1 Theoretical Review
2.2 Empirical Review
3 Methodology and Data Sources
3.1 Data Source and Variable Definitions
3.2 Variable Definitions and Expectations of sign
3.3 Estimation Method
3.3.1 Stationarity Test
3.3.3 Model Stability Check and Residual Diagnostic Test
3.4 Model Specification
3.4.1 Autoregressive Distributed Lag (ARDL) Model
4. Estimated Results and Interpretation
4.1 Descriptive Analysis
4.2 Unit Root Test
4.3 Testing for Bounds Test or Co-Integration
4.4 Long run model
4.5 ARDL Short Run Estimate Output
5. CONCLUSION AND POLICY IMPLICATIONS
5.1 Conclusion
5.2 Policy Implications
Research Objectives and Topics
The primary objective of this study is to investigate the effects of monetary policy on inflation in Ethiopia using annual time-series data covering the period from 1988 to 2021. The research employs the Autoregressive Distributed Lag (ARDL) approach to identify long-run relationships and short-run dynamics between monetary policy instruments and price levels.
- Analysis of monetary policy impacts on Ethiopian inflation.
- Examination of the long-run relationship between macro-economic variables using ARDL.
- Evaluation of short-run dynamics via Error Correction Models (ECM).
- Assessment of the impact of money supply, exchange rates, and real GDP on inflation.
- Development of policy recommendations for economic stability and foreign exchange management.
Excerpt from the Book
1 INTRODUCTION
The monetary policy pursued by a country's Central Bank has a significant impact on the country's economic and financial status. It is commonly acknowledged that maintaining price stability through monetary policy can contribute to long-term growth. When the rate of inflation is low enough, consumers and companies do not have to consider it when making daily decisions, according to Christiano and Fitzgerald (2003).
The method, through which a country's monetary authority manages the supply of money, frequently by targeting an interest rate in order to promote economic growth and stability, is known as monetary policy. It is essentially a set of actions performed by monetary authorities, usually the central bank, to control and regulate the supply of money to the public as well as the flow of credit in order to achieve preset macroeconomic objectives (Dwivedi, 2005).
Its stated objective is to maintain relatively steady pricing and low unemployment. All methods of monetary policy, in reality, require changing the amount of base currency in circulation. Open market operations are the open sales and purchases of (government-issued) debt and credit instruments that change the liquidity of the base currency. The monetary authority's constant market operations influence the supply of currency, which has an impact on other market variables including short-term interest rates and the exchange rate.
Summary of Chapters
1 INTRODUCTION: Discusses the significance of monetary policy for economic stability and provides an overview of the inflationary context in Ethiopia.
2 LITRATURE REVIEW: Analyzes theoretical frameworks (Monetarist, Keynesian, Classical) and empirical studies regarding the determinants of inflation.
3 Methodology and Data Sources: Details the research methodology, including the ARDL model, data sources from the National Bank of Ethiopia, and stationarity tests.
4. Estimated Results and Interpretation: Presents the descriptive statistics, unit root tests, co-integration bounds test, and the long-run and short-run ARDL estimation results.
5. CONCLUSION AND POLICY IMPLICATIONS: Summarizes key research findings and provides actionable policy recommendations for managing inflation in Ethiopia.
Keywords
Monetary policy, Inflation, ARDL Co-Integration, Bound test, Ethiopia, Money supply, Real effective exchange rate, Real lending rate, Real gross domestic product, Openness of trade, Economic stability, Error Correction Model.
Frequently Asked Questions
What is the core focus of this research study?
The study focuses on examining the impact of monetary policy on inflation in Ethiopia, specifically utilizing annual data from 1988 to 2021 to understand these economic variables.
Which key factors influence inflation in the context of this study?
The study identifies several key determinants, including money supply (M2), trade openness, real effective exchange rate (REER), real lending rate, and real gross domestic product (RGDP).
What is the primary goal of the research?
The goal is to provide a comprehensive, contemporary analysis of the relationship between monetary policy and Ethiopian inflation to address the current lack of sufficient studies in this area.
Which scientific method is utilized for the analysis?
The study employs the Autoregressive Distributed Lag (ARDL) cointegration approach, supplemented by unit root tests (ADF) and Error Correction Models (ECM) to assess short-run dynamics.
What is covered in the main body of the paper?
The main body covers the theoretical and empirical literature review, a rigorous explanation of the methodological framework, model specification, and a detailed discussion of estimated econometric results.
Which keywords characterize this document?
Key terms include monetary policy, inflation, ARDL co-integration, bound testing, and macroeconomic variables specific to the Ethiopian economy.
How is the model's stability verified?
The study uses CUSUM and CUSUMSQ tests to ensure that the estimated long-run and short-run coefficients are stable and reliable throughout the study period.
What conclusion does the author reach regarding the speed of adjustment?
The study estimates that approximately 21.4% of any disequilibrium in the current year is corrected back towards the long-run equilibrium within the following year.
- Quote paper
- Gediyon Bekele Moliso (Author), 2022, Effects of Monetary Policy on Inflation in Ethiopia. ARDL Co-Integration, Munich, GRIN Verlag, https://www.grin.com/document/1271754
