Abstract
Expansion is one of the major macro-economic issues which determine the better functioning of the economy. Additionally, it leads a multi-dimensional effect on the overall social, economic, financial, mechanical and political affairs of the country. To come with this problem, the study focuses on the identification and assessment of variables which determine the rate of inflation in Ethiopia using annual data from the year 1985 to 2018. The study used secondary time series data and applies econometric analysis to identify significant variables in determining inflation both in the long run and short run and descriptive methods of data analysis to identify the trend of inflation and money supply. The finding of this study shows that real interest rate and real effective exchange rate are significant in determining inflation both in the short run and long run. Broad money supply determines inflation only in the long run and gross domestic saving doesn’t determine the rate of inflation both in the long run and short run. The monetary base of the country which is broad money supply has some dispersion or different impact in determining inflation. It has significant impact in the long run but became statistically insignificant in the short run since monetary policy has higher outside lag and needs longer time to affect inflation after increasing money supply. So it is advisable to the policy makers to find the right balances whether money supply permanently determines inflation rate or it is insignificance in both short run and long run models.
Highlights
Background of the StudyInflation has a long history coinciding with the time of introduction of use of money as a medium of transaction
Trends of inflation Trend refers to the direction of movement of variables from time to time
The cause for this higher magnitude on inflation was studied by many economists and it’s found that, devaluation and cancelation of many policies by the transitional government after the downfall of derg regime was the man cause for higher rate on inflation in Ethiopia
Summary
Background of the StudyInflation has a long history coinciding with the time of introduction of use of money as a medium of transaction. During and after World War II, inflation increased at alarming rate when government financed the war, or in periods when gold discovers of the valuable changes had been made [9]. Retail price within the main industrial countries rose at a mean rate of about 2-4 percent each year from 1953 to 1959. There must be reduction of the impact of inflation on the graceful operation of the economy, essential to understand the method that makes inflation, the way during which it perpetuates itself the condition to which leads and the means by which it's managed In developing country one finds that the literature contains two major competing hypotheses which attempts to clarify the manufacturing rate of inflation [5]. In keeping with structuralists view, inflation may result from supply inelastic was down ward inflexibility of price and income an increase in developing country.
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