The effect of trade liberalization on the trade balance and current account of the balance ofrnpayments is controversial irrespective of the framework used for the analysis of balance ofrnpayments. In the partial equilibrium farm work of the elasticity approach, the effect will dependrnon the extent to which export and import duties change and the price elasticity of exports andrnimports. In the general equilibrium framework of the absorption approach to the balance ofrnpayments, the effect of liberalization 'will depend on how real income is affect relative to realrnconsumption expenditures. In the monetary approach to balance of payments, the liberalizationrncould affect both demand and supply of real money balances.rnrnThe aim of this paper is to examine the empirical analysis of the balance of paymentsrnconsequences of trade liberalization of Ethiopia. It focuses on the impact of trade liberalizationrnon the trade and current account balances of the balance of payments. The main questionrnaddressed is whether there has been an improvement or deterioration in these accounts followingrntrade reform. The data analyzed by estimating the time series econometric models using OLS andrnECM frame works to test the impacts of trade liberalization on trade balance and the currentrnrnaccount of the balance of payments in the short-run and the long-run. It uses a regression modelrnformulation, which includes domestic and world real income; real effective exchange rate andrnmoney so that the monetary, elasticity and absorption approaches to the balance of payments arernalso examined. The main findings are that trade liberalization has worsened the balance of tradernand the current account balance deficit, because imports have increased more rapidly thanrnexports. The results show also that real effective exchange rate does playa role in determiningrnthe long-run equilibrium behavior of the Ethiopian trade and the current account balance. Therncoefficient of domestic money supply variable is negative and statistically significant. Thisrnimplies that domestic money supply has an effect on trade and current account balance