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Challenges to Monetary Policy Transmission to Consumer Prices in Ethiopia

Ayele, Gashaw Tsegaye (2011): Challenges to Monetary Policy Transmission to Consumer Prices in Ethiopia.

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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.

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