This paper presents a model of monetary policy in Ethiopia after financial liberalizationrnpolicy adopted. It is designed to identify both the goals and patted of policy with the twornmajor aims: firstly to know the way how National Bank of Ethiopia systematically respondsrnto macroeconomic shocks and secondly to evaluate the performance monetary policy againstrnits initial objective including assessment of gap analysis in monetary policy frame work.rnHence, the model demonstrates that the National Bank of Ethiopia chooses the domesticrncredit as the most appropriates indicator of monetary policy with the determinants of netrnforeign assets, consumer price index, fiscal gap, real effective exchange rate and GrossrnDomestic Products to formulate the reaction function. On top of this the empirical resultsrnexplain that domestic credit has strong long run & positive relation with net foreign assets &rnto real Gross Domestic Product. But it has short run relation with consumer price index, realrneffective exchange rate and real Gross Domestic Product at different lag structure. The NBErnfollowed a combination of both accommodating and stabilization monetary policy. ThernCoefficients of equilibrating error terms, ECM suggest that the speed of adjustment! feed backrneffect towards the long run equilibrium takes many years for full adjustment when there is arnshock in the system, indicating t he longer lags structure and undeveloped financial sectorsrnresulted in obstacles for the effectiveness of monetary policy.rnRegarding to the evaluation of monetary policy objectives up on short run dynamics model ,rnBoth low inflation rate and reduction of monetization of fiscal deficit can be maintained in thernreview period while achieving the interactional reserve target is not fully under the control ofrnNBE. Basically, the attempts of NBE to maintain the growth rate of money supply at the raternof nominal GOP growth has been satisfactorily met in the review period The sterilizationrncoefficient revealed incomplete sterilization activities while the offset coefficient tell us arnhighest degree of monetary control with low degree of capital mobility.rnTherefore in general due to the non-existence of a well-developed secondary market, the lackrnof latitude to engage in discretionary activities, and partial monetization of the economy makernthe monetary policy implementation ineffective.