Dynamics and Determinants of Inflation in Ethiopia

Abstract

This study investigates the dynamics and determinants of inflation in Ethiopia over the period 1975–2015 using annual data from the National Bank of Ethiopia (NBE), the Central Statistical Agency (CSA) and the Ministry of Finance and Economic Cooperation (MOFED). The study uses the ARDL inflation model by synthesizing monetarist and structuralist views of the determinants of inflation in the country. The findings show that the major determinants of dynamics of inflation in Ethiopia are both monetary sector and structural factors. Specifically, the ARDL model shows that monetary determinants of inflation are money supply and the real interest rate. Inflation in Ethiopia both in the short and long run is not only a monetary phenomenon (such as money expansion via credit and money printing; government spending and the real interest rate) but also the result of structural factors like shocks to the real sector (mainly agricultural GDP as the agriculture sector dominates the country’s GDP). This study’s policy implications are that the Government of Ethiopia needs to follow conservative fiscal and monetary policies. It is also important to enhance economic growth as higher economic growth reduces inflationary pressures.