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Abstract

This study has estimated stable long run and dynamic money demand equations for Ethiopia. However, the study shows some portfolio demand adjustment by agents after liberalization of asset prices after 1992. The study, by estimating money demand using disaggregated price level, shows that livestock, money and housing items are complements, and money and all other goods are substitutes in the portfolio demand of Ethiopian agents. The study suggests that the government should follow a sound trade policy, strengthen the development of exchange oriented rural economy, use depreciation of currency than domestic credit control, facilitate conditions for the development of capital market and strengthen policy of indirect monetary control, and privatization to achieve sustainable growth and development. The study also suggests that the government should look for an alternative higher rate of inflation rather than targeting it to a low rate of single digit, which might hinder accelerated growth.

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