The Determinants Of Inflation In Ethiopia: Time Series Analysis

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.