Analyzing the dynamics of monetary policy and economic growth in Ethiopia: an autoregressive distributed lag (ARDL) approach

Ahmed Abduletif Abdulkadr · Yibeltal Walle · Fentahun Baylie · Ermias Berihun Workineh · Dagmawe Menelek Asfaw

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Monetary Policy and Economic Impact Economic Theory and Policy Unemployment and Economic Growth

Abstract

Abstract Numerous studies conducted by various scholars have aimed to ascertain the impact of monetary policy on economic growth. However, these empirical investigations have not reached a unanimous consensus. Therefore, this study analyzes the effect of monetary policy. To address this objective, this study employed ARDL and error correction model (ECM) based on annual data from 1993 to 2022. Granger causality test was also employed to check the direction of causal effects of one variable on the other variable. All required pre and post estimation tests were performed and verified that the model was statistically viable. The study revealed that, in the short run, deposit interest rate, reserve required amount, and open market operation have positive and statistically significant effects on real GDP growth of Ethiopia; however, money supply has negative and statistically significant effects on real GDP growth of Ethiopia. In the long run, money supply has positive and statistically significant effects on real GDP growth of Ethiopia; however, deposit interest rate and reserve required have negative and statistically significant effects on real GDP growth of Ethiopia. To sum up, in the short run, contractionary monetary policy was promising, and in the long run, expansionary monetary policy was favorable for economic growth. The Granger causality test result shows that there is bidirectional causality between monetary policy and economic growth; except there was a unidirectional relationship between deposit interest rate and economic growth. Ultimately, this research suggests the following policy recommendation: for short-term economic enhancement, it is advisable for the government to opt for a contractionary monetary policy rather than an expansionary one. On the other hand, for long-term economic improvement, an expansionary monetary policy is more favorable than a contractionary one.

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2001Bounds testing approaches to the analysis of level relationships 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 2021The impact of economic growth, energy consumption, trade openness, and financial development on carbon emissions: empirical evidence from Malaysia 2018EFFECT OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL INVESTIGATION 2020The Impacts of Monetary and Fiscal Policies on Economic Growth in Malaysia, Singapore and Thailand 2022Macroeconomics in Context 2023Financial development and economic growth in Ethiopia: Is there a causal link?2017Effectiveness of Monetary Policy Instruments on Economic Growth in Jordan Using Vector Error Correction Model

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