SHORT-RUN BEHAVIOR OF EXCESS RESERVES A CASE STUDY ON ETHIOPIAN COMMERCIAL BANKING SECTOR

The purpose of this paper is to identify and measure the impact of the factors that are responsible in shaping the behavior of excess reserves in the Ethiopian banking sector. The focus of the analysis is the Ethiopian banking sector than an individual bank. This paper deals with how the Ethiopian banking sector adjusts its excess reserve position to changes in money supply, relative yields on asset holdings, discount rate, the demand for different bank assets, availability of funds, and legal reserve requirements. Except for required reserves, the discount rate and relative yields on asset holdings, the rest of the explanatory variables are statistically significant in explaining the short run behavior of excess reserves. Therefore, we can conclude that the initial stock of excess reserves, treasury bills, loans and their lag, narrow money supply, saving deposit of the public held with different financial institutions, and bank capital are what strongly explain the short-run behavior of excess reserves in the Ethiopian banking sector.