Answer: The inflation rate and unemployment are very terrifying problems in Ethiopia and of which some policy instruments were suggested to reduce these problems. Monetary policy instruments were suggested such as
1) Open market Operation (Sale and purchase of bonds or securities issued by governments): Trading in these instruments liquefies the financial system in particular and the national economy in general and increases financial intermediation among market participants. In the absence of its securities, a certain amount of government treasury bills needs to be allocated to NBE by the government for its monetary policy purpose. To prepare the ground for enhanced open market operations, the yield on government securities should be at least close to the minimum interest rate. As a next step, the secondary market for government securities needs to be established.
2) A standing central bank credit facility is another instrument used to enhance the financial capacity of commercial banks and to promote financial intermediation and efficiency. The key advantages of such standing credit facilities are transparency and predictability of accessing central banks’ resources to cover short-term needs. This credit facility assures banks that when confronted with problems of shortfall in the clearing and a lack of alternatives for raising immediate funds in the inter-bank market, they can settle the clearing with the central bank’s funds at a reasonable interest rate which has a clear relationship with short term market interest rates.
Other monetary policy instruments used and to be used include: Reserve requirement, Setting of floor deposit interest rate (until the interest rate is fully deregulated), direct borrowing/lending in the inter-bank money market, and introducing re-purchase agreement (repo/reverse repo operations), Use of selected credit control when necessary, and Moral Suasion