The Dynamics of Inflation in Ethiopia: Time Series Approach

While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Abstract-While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Moreover, the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) Unit Root tests confirmed that the variables concerned are all integrated of order one, (I(1)). ECM regression suggest that money supply, real Gross Domestic Product, trade openness, real exchange rate, budget deficit and the nominal deposit interest rate variables have together been important in explaining the long run dynamics of inflation. Except real Gross Domestic Product and nominal deposit interest rates, the effects of the remaining ones persist also in the short run. Moreover, money supply was estimated to impose the dominant effect towards validating the classical version of QTM in the context of Ethiopian economy. Besides, monetary policy is found to be more important in the dynamics of inflation compared to fiscal policy. Furthermore, VAR Granger Causality test suggests the causation running from budget deficit to money supply; and, from money supply to inflation, but no causality was suggested in reverse. This also reveals partly the applicability of the Sargent and Wallace (1981) aspect of the so called 'fiscal dominance' in Ethiopia. Finally, the study suggests for the enhancement of effectively designed and implemented network of both monetary and fiscal policies considering the power of money supply on inflation. Moreover, investments in food and agricultural sectors could considerably support the process of ensuring price stability.

Determinants of inflation-Mebtu Melaku, 2020

Inflation, one of the basic indicators of macroeconomic stability, affects many other macroeconomic variables and it weakens the economy if it goes beyond a specified threshold level. The main objective of the study is finding out the determinants of inflation in Ethiopia. The paper uses secondary data collected from National Bank of Ethiopia and other sources. The ARDL model to co integration has been used to find out the short run and long run determinants of inflation. Findings showed that in the long run oil price, government expenditure and Broad money supply affect inflation positively at 5%, 1% and 1% respectively. However external debt and real GDP affect inflation negatively at 1% and 5% in the long run. But real exchange rate is found to be insignificant in the long run. While in the short run real exchange rate and government expenditure affect inflation positively at 5% and 1% respectively. On the other hand real GDP affects inflation negatively at 10% in the short run. But external debt, money supply and oil price are found to have insignificant effect on inflation in the short run. More over the error correction term estimated at-0.882 is significant at 1% significance level and has the recommended negative sign. Results confirm that both cost push and demand pull factors contribute to inflation in Ethiopia. The findings from this study reveal that inflation can be controlled by reducing money supply, government expenditure and oil price and by increasing external debt and real output.

Thesis, 2012

Like many countries, one of the most fundamental objectives of macroeconomic policies in Ethiopia is to sustain high economic growth with low inflation. The relationship between growth and macroeconomic variables is one, which many economists have watched with keen interest. This paper investigates the relationship between growth and inflation based on unstructured VAR model. The methodologies used in this study are the cointegration, Granger causality and vector error correction model test. Consumer price index (CPI) was used as a proxy for inflation and the real GDP as a perfect proxy for economic growth to examine the relation. The scope of the study spanned from 1976-2010. A stationary test was carried out using Graphical approach and Augmented Dickey Fuller test (ADF) and Phillip-Perron test (PP) and stationarity found at first difference at 5% level of significance. The Johnson cointegration test using Trace statistic and Maximum eigenvalue test result showed that for the periods, 1976-2010, there was long run co-integrating relationship between growth, inflation and the selected macroeconomic variable broad money supply. Based on the result economic growth and inflation has a negative relationship with low standard error value implying a low statistical noise in the estimates. A positive relationship was found between inflation and broad money supply with low standard error in the long run. The relations are statistically significance at 10% level of significance for both independent variables. Similarly, in the short run inflation level of last year and real GDP negatively and significantly affecting the inflation level. While broad money supply positively related with inflation level. Moreover the result reveals that the coefficient of the error-term or the speed of adjustment term for the estimated inflation equation is both statistically significant and negative. Implying that, if actual equilibrium value is too high, the speed of adjustment will reduce it and if it is low, the error correction term will raise it. The coefficient term -0.481111 shows that 48 % adjustment will be taken each year to converge to the long run equilibrium level. The parsimonious model and variance decomposition approach confirmed the result. And, Granger causality test results showed unidirectional causality. Therefore, the study advices Policy makers to adopt inflation targeting strategy, taking combined fiscal and monetary policy together, regulations on commercial financial lending institutions and government should curtail unproductive expenditure.

Abdella Mohammed Ahmed (M.Sc.), 2024

This study has aimed at investigating the impact of money supply and related variables on inflation in Ethiopia and testing the causal link between the two variables. The study uses secondary data collected from NBE, EEA and CSA for the period 1980-2015. The researcher had employed both descriptive and econometrics model to analysis the data .the descriptive part of analysis used graphs, tables and percentage. While, the Econometric model analyzed by using ordinary least square (ols), as a general method of analysis and error correction model and co-integration technique were conducted to see the short run and long run relationship respectively On other hand, Granger causality test was applied to test the causal relationship between money supply and inflation. The empirical result of the study reveals that expected inflation and money supply are the major determinants of inflation in Ethiopia in the short run and realgdp, imported inflation, and exchange rate would affect inflation in long run again expected inflation and imported inflation have effect in both time periods. Regarding the causal link between money supply and inflation, as the result suggested, feedback relationship exist, meaning money causes inflation, likewise, inflation causes money growth The police implication of these results includes, among other that the government should further control the money supply of the country and it should look for other means of revenue generation than money creation to meet it is transaction, so that the inflation rate of the country will reduce. And Encouraging and expanding domestic import substituting industries to reduce the effect of imported inflation through foreign price and exchange rate change are other means of stabilizing the price.

European Journal of Business Science and Technology

Maintaining inflation rate at optimal level is among important mechanism of balancing macroeconomic volatility to ensure steady economic growth. This study aims to examine macroeconomic determinants of inflation in Ethiopia. The study employed ARDL model using annual data for period 1981-2020. The ARDL bound test was applied to examine the presence of con-integration between inflation and independent variables. The study also uses augmented Dickey-Fuller and Phillips-Perron unit root tests to check stationarity of the variables. The test result reveals that almost all variables become stationary after the first difference. Accordingly, the result from bound test indicated existence of long run relationship between the dependent variable and explanatory variables entered into the model. The estimated error correction model (ECM) with -0.53 coefficient also confirms the existence of co-integration with high speed of adjustment towards the long run equilibrium. In the long run: real GDP, real effective exchange rate, lending interest rate are positive and significant determinants of inflation whereas broad money supply, real GDP, population growth, gross national saving and previous year imports are found to be the short run drivers of inflation. The finding recommends, among others, measures on reducing real effective exchange rate and utilizing broad money supply in productive economic activities along with supply side should be designed to contain inflation in Ethiopia.

2017

While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being ‘always and everywhere a monetary phenomenon’. On the other side, Keynes’s version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The ohnson’s Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model.

Research Paper, 2023

Ethiopian economy is one which has experienced consistently a high exchange rate depreciation and money supply with unstable inflation rate for the last many years. The main objective of the study was to examine the effect of money supply and exchange rate on inflation in Ethiopia by using annual time series data over the period from 1980 to 2021. For this purpose both descriptive and econometrics methods of analysis, such as the Classical OLS long run regression, Engle-granger causality and Error correction models were employed. The result of the study revealed that both money supply and real effective exchange rate have a positive and statistically significant effect to influencing inflation rate, in the long run as well as short run. Moreover, the result revealed that there are 3 bi-directional of granger causality (MS and CPI, CPI and REER and MS and REER). Based on these results, the following recommendations are proposed. NBE should be reduced and restricted the borrowing interaction with government, ministry of finance in particular. NBE should have to exercise a natural rights gives for central banks. Specifically, an operational independency is the core and decisive right that one central bank must use to achieve its objective like price stability as well as it's the most important right to manage the stock of money in the economy. .

The study was carried out to assess and examine the macroeconomic determinates of inflation in Ethiopia. In addition to this the macroeconomic variables which determined inflation in the country are the main objective of the study. We estimate models of inflation to identify the importance of factors contribution to inflation and three of its major components: RGDP, INVT,

Policy Research Working Papers, 2021

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Abdella Mohammed Ahmed (M.Sc.), 2024

The recent historical evidence indicated that Ethiopia has suffered from high inflationary experience owing to weather shocks (drought) and conflict (war). Despite its sustained economic growth and one of the fastest growing non-oil producing economies in Africa, the country had experienced soaring inflation distorting allocation of resources and deterrent to undertaking productive investments. In effect, households in Ethiopia especially urban poor were badly hurt and still the problem persist all over the country. This paper has critically reviewed the trends, the main causes and consequences of inflationary pressure and the role of macroeconomic policy in Ethiopia. The result showed that the magnitude of inflation in Ethiopia was found to be very high and the trends of inflation in Ethiopia seem to continue. Four main causes of inflation in Ethiopia were identified. The result concur with theories of inflation as an economic growth phenomenon, demand-pull and cost-push theories of inflation, the monetarist explanation of the causes of inflation, and fiscal budget deficit as the main source of inflation. Moreover, some oligopolistic pricing by few distributors/traders in Ethiopia was also identified as the major determinant of inflation. This implies the presence of monopoly power/market failure in price formation. To this end, the Ethiopian government has adopted various fiscal and monetary policy measures to control and mitigate the adverse effects of inflation in the country. A mix of monetary policy instruments such as adjusting reserve requirement and interest rates, and sale and purchase of bonds have been implemented for lessening the effect of inflation and better performance of the economy. However, the effectiveness of these policies in achieving the intended goal largely depends on the institutional factors that constrain the implementation process of the policy. To contain inflation, therefore, the government needs to exercise conservative fiscal and monetary policies measures.