Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.12, No.5, 2021 1 Impact of Broad Money Supply on Economic Growth of Ethiopia Yeshiwas Ewinetu Tegegne College of Business and Economics, Economics Department Debre Markos University Abstract This study is targeted to examine the impact of money supply on Real GDP of Ethiopia. The data used for this study was a time serious (2002-2017) data obtained from national bank of Ethiopia Annual report. The data is analyzed using Vector Autoregressive model and causality test to check the short causality between broad money supply and Real GDP growth in Ethiopia and the result of both tests revealed that broader money supply has positive significant effect on real GDP and statically significant at 5 percent level. However, Johansen co- integration test result shows that there is no long run association ship running from broader money supply to real GDP.The policy implication was that any short run fluctuation in country’s broad money supply level by monetary policy officials will bring a significant positive impact on Real GDP in the short run . Keywords: Broader money supply, Real GDP Impact, Vector Auto Regressive model DOI: 10.7176/RJFA/12-5-01 Publication date:March 31 st 2021 I. Introduction The annual report of national bank of Ethiopia shows that for the last sixteen years the mean growth rate of broader money supply in Ethiopia was 23.38 per year. During the year 2017-2018, the amount of broad money supply in Ethiopia is attained more than Birr740 billion having annual growth rate of above 29 percent per annum resulted from domestic loan expansion given to federal and state government of Ethiopia. Additionally, the amount of traditional money supply components increased by more than 29 percent resulted from increase in currency and demand deposit of commercial banks of Ethiopia which is a pointer of expansion of demand for money for transaction motives. Moreover, amount of quasi-money increased above 28 percent caused by an increase in the amount of time and saving deposit of commercial banks through new branch expansion. Correspondingly, the Ethiopia economy records mean annual growth rate of real GDP rose by 9.32 percent during the year 2002/3 to 2017/18. In economics with regard to the impact of money supply toward the economics growth of a given nation had inconclusive findings (Wang Yan-liang, 2012; Bin Liu, 2001; Nwoko, Nnenna M.,et al,2016; Iwedi Marshal, 2016). And hence, this study aims to examine the impact of broad money supply on Real GDP in Ethiopia over the period 2002-2017. II. Literature Review 2.1 Theoretical literature review We have basically four theories with regard to the theory of money supply which can be explained as follows: 1. Traditional Approach Under this theory money supply is defined as a medium of exchange which consists of currency in the hands of the public plus demand deposits in commercial banks (Keith band and Peter Howells, 2003;Wynne Godley and Marc Lavoie,2007). It is also called narrow money (M1). Hence, M1=C+DD, where C is currency outside the bank, DD is demand deposit. 2. The Chicago approach The Chicago economists led by Professor Milton Friedman adopted a broader definition of money and symbolized as M2 and they define money supply as a temporary store of value. Their argument is that since in the economy money income and spending flow streams are not completely harmonized in time so as to make transaction money should be temporarily stored as a general purchasing power (Keith band and Peter Howells,2003;WynneGodley& Marc Lavoie,2007). Thus; M2=M1+Savings deposits + Time deposit. 3. Gurley and Shaw Approach This approach is associated with the names of Professor John G. Gurley and Edwards Shaw. According to these economists there exists a fairly large spectrum of financial assets which are close substitutes for money and symbolized as M3. Therefore, they define money supply asserts adjacent to financial intermediaries. They believed that all these are feasible options to liquid stores of value to the community. Thus; M3=M2+S+B .Where, S is Shares of credit institution and B is Bonds. Where, S= Shares of credit institutions, B= Bonds The approach further views money supply as a weighted sum