ANALYZING THE EFFECTIVENESS OF MONETARY POLICY TRANSMISSION MECHANISM IN ETHIOPIA: A VAR MODEL APPROACH

This study examines the effectiveness of monetary policy transmission mechanism in Ethiopiaand dynamic relationships between key macroeconomic variables real GDP growth (RGDP), consumer price index (CPI), broad money supply (M2), and real interest rates (RIR) in Ethiopia from 1995 to 2024. Using vector autoregressive (VAR) modeling and time series analysis. The empirical analysis reveals several important findings. First, GDP growth demonstrates strong persistence, with current growth significantly influenced by its own lagged values. Second, monetary variables (CPI and M2) show statistically insignificant short-run effects on GDP growth, suggesting limited immediate impact from monetary policy interventions. Third, the Johansen co integration test indicates no strong long-run equilibrium relationship among the variables at conventional significance levels.Findings suggest important policy implications that structural reforms in infrastructure, education, and institutions may be more effective than monetary adjustments for sustaining long-term growth; central banks should adopt cautious, forward-looking monetary policies and policymakers need to develop coordinated fiscal monetary strategies that account for the limited short term responsiveness of growth to monetary variables.