Exploring Cointegration Relations and Determinants of Ethiopian Money Supply: Autoregressive Distributed Lag Approach

The money supply plays a pivotal role in economic stability and growth in Ethiopia, making its analysis a critical addition to policy discussions. This study provides new insights into the macroeconomic determinants of broad money supply in Ethiopia, addressing a critical gap in the literature by analyzing both long-term and short-term dynamics over an extended period of 44 years. Using annual data from 1980 to 2023 from the National Bank of Ethiopia and the International Monetary Fund, this study employs an autoregressive distributed lag model to analyze cointegration relationships and identify the key drivers of Ethiopian money supply. Stationarity tests (augmented Dickey-Fuller and Phillips-Perron) confirmed that most variables became stationary after first differencing. The autoregressive distributed lag model bounds test indicated a long-run equilibrium relationship between the broad money supply and its determinants. In the long run, inflation, real gross domestic product, population, and the real effective exchange rate were found to positively and significantly influence money supply. In the short run, structural breaks in inflation (notably in 2011) and lagged inflation negatively impacted the money supply. The error correction term of -29.8% suggests a 3.4-year adjustment period toward equilibrium. These findings underline the interplay between inflation, exchange rate dynamics, and demographic changes in shaping monetary trends. This study contributes to policy discussions by recommending tightened monetary policies, strategies to balance population growth with economic development, and measures to stabilize the real effective exchange rate to ensure sustainable money supply management.