Inflation is defined as a persistent increase in general price level of goods and services. Even ... more Inflation is defined as a persistent increase in general price level of goods and services. Even though Ethiopia has experienced a low inflation until 2002/3, recently, double digit inflation has become troublesome for policy makers as well as the society. Therefore, this study was carried out to identify the major determinants of inflation in Ethiopia by employing the techniques of Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data starting from 1987/88 to 2018/19. The study included macroeconomic determinants and non-economic factor that alter inflation level measured by consumer price index such as, real gross domestic product, nominal exchange rate, broad money supply, external debt, foreign aid, tariff rate and dummy for political stability. The results of bounds test confirmed that there is a long run relationship between the explanatory variables and consumer price index in Ethiopia. The empirical result implied evidence of a long-run positive and significant (p-value<0.05) effect of nominal exchange rate, broad money supply, external debt and foreign aid with coefficients 1.130896, 1.980892, 1.641140 and 2.513185, respectively on inflation in Ethiopia whereas real gross domestic product and dummy of political stability significantly (p-value<0.05) and negatively affect price level with coefficients -5.371298 and -3.698385, respectively in the long run. Finally, from the finding of the study in the short run, broad money supply and external debt has positive and significant (p-value<0.05) effect on inflation in Ethiopia with coefficients 0.292621 and 0.1699, respectively. Real gross domestic product and dummy for political stability are also the main significant (p-value<0.05) determinants of inflation with negative coefficients (I.e. - 0.793457 and -0.495005, respectively) in the short run. Given these findings, the monetary policy should be planned to maintain price stability by controlling the growth of money supply and devaluation of the domestic currency in the economy. Also combined efforts should be made by policy makers to increase the supply of output so as to reduce the prices of goods and services and there should be democratic political discussions among the political parties to reduce the political conflicts and instabilities.
Inflation is defined as a persistent increase in general price level of goods and services. Even ... more Inflation is defined as a persistent increase in general price level of goods and services. Even though Ethiopia has experienced a low inflation until 2002/3, recently, double digit inflation has become troublesome for policy makers as well as the society. Therefore, this study was carried out to identify the major determinants of inflation in Ethiopia by employing the techniques of Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data starting from 1987/88 to 2018/19. The study included macroeconomic determinants and non-economic factor that alter inflation level measured by consumer price index such as, real gross domestic product, nominal exchange rate, broad money supply, external debt, foreign aid, tariff rate and dummy for political stability. The results of bounds test confirmed that there is a long run relationship between the explanatory variables and consumer price index in Ethiopia. The empirical result implied evidence of a long-run positive and significant (p-value<0.05) effect of nominal exchange rate, broad money supply, external debt and foreign aid with coefficients 1.130896, 1.980892, 1.641140 and 2.513185, respectively on inflation in Ethiopia whereas real gross domestic product and dummy of political stability significantly (p-value<0.05) and negatively affect price level with coefficients -5.371298 and -3.698385, respectively in the long run. Finally, from the finding of the study in the short run, broad money supply and external debt has positive and significant (p-value<0.05) effect on inflation in Ethiopia with coefficients 0.292621 and 0.1699, respectively. Real gross domestic product and dummy for political stability are also the main significant (p-value<0.05) determinants of inflation with negative coefficients (I.e. - 0.793457 and -0.495005, respectively) in the short run. Given these findings, the monetary policy should be planned to maintain price stability by controlling the growth of money supply and devaluation of the domestic currency in the economy. Also combined efforts should be made by policy makers to increase the supply of output so as to reduce the prices of goods and services and there should be democratic political discussions among the political parties to reduce the political conflicts and instabilities.
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though Ethiopia has experienced a low inflation until 2002/3, recently, double digit inflation has
become troublesome for policy makers as well as the society. Therefore, this study was carried
out to identify the major determinants of inflation in Ethiopia by employing the techniques of
Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data starting from 1987/88 to
2018/19. The study included macroeconomic determinants and non-economic factor that alter
inflation level measured by consumer price index such as, real gross domestic product, nominal
exchange rate, broad money supply, external debt, foreign aid, tariff rate and dummy for
political stability. The results of bounds test confirmed that there is a long run relationship
between the explanatory variables and consumer price index in Ethiopia. The empirical result
implied evidence of a long-run positive and significant (p-value<0.05) effect of nominal
exchange rate, broad money supply, external debt and foreign aid with coefficients 1.130896,
1.980892, 1.641140 and 2.513185, respectively on inflation in Ethiopia whereas real gross
domestic product and dummy of political stability significantly (p-value<0.05) and negatively
affect price level with coefficients -5.371298 and -3.698385, respectively in the long run. Finally,
from the finding of the study in the short run, broad money supply and external debt has positive
and significant (p-value<0.05) effect on inflation in Ethiopia with coefficients 0.292621 and
0.1699, respectively. Real gross domestic product and dummy for political stability are also the
main significant (p-value<0.05) determinants of inflation with negative coefficients (I.e. -
0.793457 and -0.495005, respectively) in the short run. Given these findings, the monetary policy
should be planned to maintain price stability by controlling the growth of money supply and
devaluation of the domestic currency in the economy. Also combined efforts should be made by
policy makers to increase the supply of output so as to reduce the prices of goods and services
and there should be democratic political discussions among the political parties to reduce the
political conflicts and instabilities.
though Ethiopia has experienced a low inflation until 2002/3, recently, double digit inflation has
become troublesome for policy makers as well as the society. Therefore, this study was carried
out to identify the major determinants of inflation in Ethiopia by employing the techniques of
Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data starting from 1987/88 to
2018/19. The study included macroeconomic determinants and non-economic factor that alter
inflation level measured by consumer price index such as, real gross domestic product, nominal
exchange rate, broad money supply, external debt, foreign aid, tariff rate and dummy for
political stability. The results of bounds test confirmed that there is a long run relationship
between the explanatory variables and consumer price index in Ethiopia. The empirical result
implied evidence of a long-run positive and significant (p-value<0.05) effect of nominal
exchange rate, broad money supply, external debt and foreign aid with coefficients 1.130896,
1.980892, 1.641140 and 2.513185, respectively on inflation in Ethiopia whereas real gross
domestic product and dummy of political stability significantly (p-value<0.05) and negatively
affect price level with coefficients -5.371298 and -3.698385, respectively in the long run. Finally,
from the finding of the study in the short run, broad money supply and external debt has positive
and significant (p-value<0.05) effect on inflation in Ethiopia with coefficients 0.292621 and
0.1699, respectively. Real gross domestic product and dummy for political stability are also the
main significant (p-value<0.05) determinants of inflation with negative coefficients (I.e. -
0.793457 and -0.495005, respectively) in the short run. Given these findings, the monetary policy
should be planned to maintain price stability by controlling the growth of money supply and
devaluation of the domestic currency in the economy. Also combined efforts should be made by
policy makers to increase the supply of output so as to reduce the prices of goods and services
and there should be democratic political discussions among the political parties to reduce the
political conflicts and instabilities.