Determinants of Price Dynamics in Ethiopia

Abstract

Since recent years inflation has become the most important macroeconomic problem in Ethiopia. This study examines the sources of this inflationary pressure using annual data spanning over 1971 - 2014. The study estimates a comprehensive price equation and performs some simulation analysis to uncover the sources of inflationary pressure. The result of the exercise indicates that monetary and fiscal fundamentals are important determinants of price dynamics in the short run. In the long run, output remains to be the most important variable. The result also indicates that the relationship between inflation and foreign prices is rather weak.

Keywords: Inflation, Macroeconomic Policies, Money Supply, Fiscal Deficit and Real GDP