Inflationary Expectations in Ethiopia: Some Preliminary Results
27 Pages Posted: 24 Dec 2008
Date Written: December, 22 2008
We analyze short-run dynamics of inflation in Ethiopia, using a parsimonious error-correction model fitted with monthly observations. Our findings show that increased money supply and the nominal exchange rate significantly affect inflation in the short-run. Agricultural output shocks, proxied by a cereal-weighted agricultural production index, are also important. By providing an accommodative financial environment, our findings suggest that monetary policy in Ethiopia triggers price inertia, which has large and persistent effects. A simulation suggests that monetary policy alone may be unfeasible to control inflation effectively. To circumvent an extreme tightening with discouraging impacts on growth, additional measures are needed. These should improve the transparency and credibility of monetary policy, and reduce structural barriers that affect price formation and market efficiency.
Keywords: Ethiopia, Error-correction Model, Inflation, Inertia
JEL Classification: E31, E37, E52, O55
Suggested Citation: Suggested Citation