Monetary, Fiscal, and Structural Drivers of Inflation in Ethiopia : New Empirical Evidence from Time Series Analysis
This study empirically investigates the drivers of inflation in Ethiopia using monthly data from July 1998 to September 2020. It explores short-run and long-run effects of domestic and external determinants of inflation—including demand-side, suppl...
| Main Authors: | , , , , |
|---|---|
| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/undefined/889061639421282989/Monetary-Fiscal-and-Structural-Drivers-of-Inflation-in-Ethiopia-New-Empirical-Evidence-from-Time-Series-Analysis http://hdl.handle.net/10986/36739 |
| Summary: | This study empirically investigates
the drivers of inflation in Ethiopia using monthly data from
July 1998 to September 2020. It explores short-run and
long-run effects of domestic and external determinants of
inflation—including demand-side, supply-side, and structural
factors—using the cointegration and vector error correction
methodology. Four measures of inflation are considered:
cereals, food, nonfood, and all items consumer price index
inflation. A key contribution to the existing literature is
the investigation of the role of the fiscal sector in
modeling inflation, a topic that has been neglected in the
existing studies on inflation in Ethiopia. The empirical
results show that disequilibria in the monetary sector,
grains sector, and food markets have long-run effects on
inflation. In the short run, inflation is driven by
structural factors (notably, cereal output gaps and imported
inflation) as well as demand-side factors (notably, money
growth and public sector borrowing). The results hold when
the analysis is limited to the high growth period from 2005
onward, following the end of the International Monetary Fund
program in the country. The evidence provides valuable
insights in the context of ongoing macroeconomic policy
reforms in Ethiopia. |
|---|