Main menu

External shock and Monetary Policy in Ethiopia: evidenced from a narrative approach


This study investigates the effects of the recent oil and food price shocks on the main macroeconomic variables and analyzes the responses conducted by the National Bank of Ethiopia. Due to problems of identification in the statistical approach, the study uses the Narrative approach of analysis (developed by Romer C. and Romer D. (1989)). The study found that oil and food price shock of 2006-2009 is highly correlated to movements in price of energy and food in Ethiopia. Both consumer price index and pump price for diesel fuel exhibit similar trends with global food price and global energy price indexes. During the period, inflationary pressure has reached its peak with the headline inflation about 36.4 percent during July 2008. Given the accommodative nature of monetary policy, and vigorous economic activity, output gap has become positive and real saving interest rate exhibits negative rate until effective monetary policy had conducted as of April 2008.The National Bank of Ethiopia supported by fiscal and  administrative strategies, has conducted effective monetary policies by raising the reserve requirement ratio by 500 basis points and the liquidity requirement by 1000 basis points effective April 2008. This has brought significant decrease to inflation; an increase in real interest rates and cool down the vigorous economic activity to its potential level. Clear transmission of monetary policy is found for all channels. The study suggests the use of fiscal policy and administrative strategies in compliment to monetary policies

Corporate Author: 
Ethiopian Economics Association (EEA)
Ethiopian Economics Association (EEA)
Primary Descriptors: 

Channels of transmission, Macroeconomic performance

Secondary Descriptor: 

External shock, Monetary policy

Geographic Descriptors: 
Cataloge Date: 
Broad Subject heading: 
Call Number: 
Serial Key Title: 
Proceedings of the Fifteenth International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Publication date: 
2018-06-01 00:00:00
Conference Place: 
EEA Multi-purpose Building Conference Hall, Addis Ababa
Place of publication: 
Addis Ababa
Type of material: 
Current frequency: 
Thematic area: 
Microeconomics, Industry and Social Sector Related
Conference date: 
July 20 – 22, 2017