The objective of this research is to show the causality effect between money supply growth and Price level in Ethiopia using a co-integrated Vector Auto Regressive (VAR) model over the period 1975 to 2012. The result of cointegration test, using Johansen Maximum likelihood approach, indicates the existence of long run relationship among the variables entered in both inflation and growth models .To explore the short-run direction of causality between Money Supply and Consumer Price Index (CPI), Granger Causality test has been applied and in order to investigate the existence of long-run relationship, cointegration analysis has been employed. The direction of causation between money and prices, the analyses suggests that the causation runs from money supply to prices, but price level does not causes money supply. Further, the co-integration analysis established that money supply and CPI were found to be co-integrated suggesting an existence of long-run relationship.
