| Abstract: | In Least developed countries (LDCs) like Ethiopia, one of the major
macroeconomic problems is the absence of effective monetary policy. The
money demand function play a major role in macroeconomic analysis,
especially in selecting appropriate monetary policy actions. The objective of
monetary policy in LDCs is usually related to money and credit control,
price stabilization and economic growth. Many LDCs considered, price
stability as the most important objective of monetary policies and it is
important to testing the stability of parameter of money demand function
indicate the effectiveness of the conduct of monetary policy. The research to
be conducted therefore is to investigate the determinants of money demand
function. Based on the data, an error correction model (ECM) will be
applied to estimate the money demand function in Ethiopia. From the study it
is found that, money demand is positively related with real GDP and it is
negatively related with expected inflation and real effective exchange rate.
Therefore, the paper recommends that the determinant of money demand
which is real GDP, real money balance, inflation rate and real effective
exchange rate should be first stabilized in order to have appropriate
circulation of money. |
