Abstract:
The ongoing global financial crisis and the attendant economic meltdown have placed on the centre stage the interaction of internal and external factors in shaping macroeconomic developments in the context of emerging and low-income countries. In this paper, I construct a medium-scale open economy Dynamic Stochastic General Equilibrium (DSGE) model to study business cycle fluctuations under money growth rule. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity, and imperfect capital mobility. I also distinguish between liquidity constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period 2000.1-2013.4. The main result suggests that the model economy with money growth rule is substanially less powerful or more muted for the amplification and transmission of exogenous shocks originating from governemnt spending programmes, monetary policy, technological progress, and exchange rate movements.
