Abstract:
Inflation refers to a situation in which the economy’s overall price level is rising. Therefore, one
of the prime objectives of governments is achieving stable macroeconomic condition. The
objective of this study was to examine the major determinants of inflation in Ethiopia using
secondary data were collected from sample bank for the period 2000q1 to 2023q4. In addition,
to achieve the objectives descriptive and explanatory research design with mixed research
approach were used. The study employed the ordinary least square method to test for the
existence of a short-run and long-run relationship between inflation and its determinant
variables. The co-integrating regression considers only the long-run property of the model and
does not deal with the short-run dynamics explicitly. For this, the error correction from the long
run determinants of inflation is then used as a dynamic model to estimate the short run
determinants of inflation. 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 RGDP, Broad money
supply, investment and credit facility affect inflation positively at 1% significance. However,
import affects inflation negatively at 1% in the long run. But real exchange rate, government
expenditure and export is found to be insignificant in the long run. While in the short run
exchange rate, RGDP affect inflation positively at 1% respectively. On the other hand, import
affects inflation negatively at 5% in the short run. But exchange rate, import and RGDP are
found to have insignificant affect inflation in the short run. More over the error correction term
estimated at -0.0014 is significant at 1% significance level and has the recommended negative
sign. Results confirm that both long run and short run factors contribute to inflation in Ethiopia.
To contain inflation, therefore, the government needs to exercise prudent fiscal and monetary
policies. Inflation expectations need to be undertaken by way of credible government policies to
change public opinion. This study recommended that broad money supply is to be controlled and
foreign trade (export and import) is to be balance to reduce inflation in the country.
