The purpose of this paper is to investigate the effects of unanticipated monetary policy innovations on output and price for Ethiopia from 1991:Q1 to 2016:Q1.
Short run and long run identification schemes on structural vector autoregressive model are employed in this study.
The impulse response function results generated show that while a positive shock in interest rate causes a reduction in output and price puzzle, a positive shock to broad money supply has a positive and significant effect on output and price. A positive shock in real effective exchange rate has also an expansionary, though insignificant, effect on impact on both output and price. These results are especially true for the short run identification scheme. As to the results from the variance decomposition, the study shows that the highest variation in output and price is caused by broad money supply shock in the short run.
It adds to the scarce empirical literature on the effects of monetary policy innovations on the Ethiopian economy.
