TRANSMISSION MECHANISMS OF MONETARY POLICY INETHIOPIA: EVIDENCE FROM STRUCTURAL VAR APPROACH

This study sought to examine the relative importance of the different monetary policy transmission channels and its effect on key macroeconomic variables using quarterly time series data covering from 1994/95Q1 to 2017/18Q4 in Ethiopia. Structural Vector Autoregressive model (SVAR) was used to address the issues.All the variables are tested for unit roots using ADF and PP test and model stability and other necessary tests was conducted. The estimation result indicates that the monetary aggregate, exchange rate and credit to the private sector are effective channels of monetary policy transmission in affecting output and inflation in Ethiopia, while the interest rate channel is weak. From a policy perspective, the results indicate that National Bank of Ethiopia is required to continuously monitor the developments of the monetary aggregate, the credit and foreign exchange markets in order to design effective monetary policies. In addition, it would help to the NBE to implement an effective monetary policy for achieving price and exchange rate stability and support sustainable economic growth through the appropriate monetary channels.