Determinants of Inflationary Experience in Ethiopia

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The main aim of this study is to investigate the determinants of inflationary experience in Ethiopia. The study focused on economic and econometric criterion to examine the long run and short run impacts of macroeconomic variables on inflation in Ethiopia. In order to accomplish this paper, the study has employed time series data for the period from 1974/75 to 2014/15. To check for the stationarity of the variables, the researcher has used augmented dickey fuller and Phillips-Perron unit root test and all variables become stationary at first difference. Then, long run and short run estimates had been examined by using Johansen Co-integration methodology and Vector Error Correction approach with lag length of two. The data on macroeconomic variables were taken from National Bank of Ethiopia, Ethiopian Economic Association and World Bank database. The findings of the study indicated that in the long run consumer price index has found to be positively influenced by money supply, real gross domestic product and overall budget deficit in which these all variables are positive and statistically significant determinants of inflation. The growth of money supply should be continually kept in control, given its long run potential impact in accelerating inflationary pressure to ensure stable price level in an economy and keep on the growth of real gross domestic product with single digit inflation rate and displaying a high sense of transparency in fiscal operations bring about a realistic budget deficit that would serve as incentives to productivity and stable general price level.