Transmission Mechanism of Monetary Policy Channels and Economic Growth in Ethiopia: Cointegration and Causality Analysis Approach

Abstract

This paper aims to investigate the relationship between transmission mechanism of monetary policy channel and economic growth in Ethiopia. Johansson co-integration, vector error correction model (VECM), Granger causality test were utilized for a time series data collected from 1972 to 2018. Broad money supply, real effective exchange rate and deposit interest rate have positive and domestic credit has negative effect on real economic growth in the long-run whereas in the short run broad money supply, real effective exchange rate have positive but, domestic credit and deposit interest rate have negative relationship with real economic growth. Real economic growth, broad money supply, domestic credit and real effective exchange rate have bidirectional causality whereas deposit interest rate has one directional causality with real economic growth, broad money supply, domestic credit and real effective exchange rate. Monetary policy transmission mechanisms channels are most important in promoting real economic growth in Ethiopia through creation of modern banking sector, so as to enhance domestic investment, the instrument to increase output per capital and hence promoting economic growth in the long-run.

Keywords: Granger Causality, Johansson Co-integration, Monetary Policy, Time Series, Vector Error Correction Model (VECM)

DOI: 10.7176/RHSS/12-1-03

Publication date: January 31^st 2022