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Challenges to Monetary Policy Transmission to Consumer Prices in Ethiopia

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  • Ayele, Gashaw Tsegaye

Abstract

The study examines challenges to monetary policy transmission, focusing on the National Bank of Ethiopia's (NBE) price stabilization policies. The NBE's monetary policy framework aims to maintain price and exchange rate stability while supporting economic growth. However, controlling the broad money supply (M2) poses obstacles. For instance, excess reserves in the banking system and anomalous negative real deposit and lending rates complicate the matter. The study extensively analyzed the Consumer Price Index (CPI) to identify the drivers of price growth, understand how bank financing flows into it, and the implications for monetary policy transmission—examining the CPI basket's composition and its linkages to the financial system. Ethiopia could enhance its ability to ensure price stability by fostering a more developed interbank money market. To accomplish this goal, the central bank can implement a system of credit guarantees and design mechanisms to channel excess financial reserves into productive uses, thereby strengthening the supply side of the price mechanism. Collaborating with fiscal authorities, particularly in acquiring government guarantees for bank lending in sectors like agriculture and food, can facilitate this process.

Suggested Citation

  • Ayele, Gashaw Tsegaye, 2011. "Challenges to Monetary Policy Transmission to Consumer Prices in Ethiopia," MPRA Paper 118058, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:118058
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    File URL: https://mpra.ub.uni-muenchen.de/118058/1/monetary%20policy%20Transmission%20in%20Ethiopia.pdf
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    References listed on IDEAS

    as
    1. L. Randall Wray, 1997. "Deficits, Inflation, and Monetary Policy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 19(4), pages 543-571, July.
    2. Tony Addison & Alemayehu Geda, 2001. "Ethiopia's New Financial Sector and Its Regulation," WIDER Working Paper Series DP2001-55, World Institute for Development Economic Research (UNU-WIDER).
    3. Herrera, Luis Oscar & Valdes, Rodrigo O., 2001. "The effect of capital controls on interest rate differentials," Journal of International Economics, Elsevier, vol. 53(2), pages 385-398, April.
    4. Akhand A. Hossain & Anis Chowdhury, 1998. "Open-Economy Macroeconomics for Developing Countries," Books, Edward Elgar Publishing, number 831.
    5. Bofinger, Peter, 2001. "Monetary Policy: Goals, Institutions, Strategies, and Instruments," OUP Catalogue, Oxford University Press, number 9780199248568.
    6. Mr. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa," IMF Working Papers 2006/115, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumer Price Index; inflation; bank; excess reserves; monetary policy; budget deficit;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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