Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia

59 Pages Posted: 20 Apr 2016

See all articles by Josef Ludger Loening

Josef Ludger Loening

University of Goettingen (Gottingen) - Ibero-America-Institute for Economic Research

Dick Durevall

Göteborg University - School of Business, Economics and Law

Yohannes Ayalew Birru

affiliation not provided to SSRN

Date Written: June 1, 2009

Abstract

Ethiopia has experienced a historically unprecedented increase in inflation, mainly driven by cereal price inflation, which is among the highest in Sub-Saharan Africa. Using monthly data from the past decade, the authors estimate error correction models to identify the relative importance of several factors contributing to overall inflation and its three major components, cereal prices, food prices, and non-food prices. The main finding is that, in a longer perspective, over three to four years, the main factors that determine domestic food and non-food prices are the exchange rate and international food and goods prices. In the short run, agricultural supply shocks and inflation inertia strongly affect domestic inflation, causing large deviations from long-run price trends. Money supply growth does affect food price inflation in the short run, although the money stock itself does not seem to drive inflation. The results suggest the need for a multi-pronged approach to fight inflation. Forecast scenarios suggest monetary and exchange rate policies need to take into account cereal production, which is among the key determinants of inflation, assuming a decline in global commodity prices. Implementation of successful policies will be contingent on the availability of foreign exchange and the performance of agriculture.

Keywords: Markets and Market Access, Currencies and Exchange Rates, Economic Theory & Research, Food & Beverage Industry, Emerging Markets

Suggested Citation

Loening, Josef Ludger and Durevall, Dick Johnny and Birru, Yohannes Ayalew, Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia (June 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1427629

Josef Ludger Loening (Contact Author)

University of Goettingen (Gottingen) - Ibero-America-Institute for Economic Research ( email )

Oeconomicum II/99
Platz der Goettinger Sieben 3
Goettingen, 37073
Germany
+49 (551) 39-8172 (Phone)
+49 (551) 39-8173 (Fax)

HOME PAGE: http://www.iai.wiwi.uni-goettingen.de

Dick Johnny Durevall

Göteborg University - School of Business, Economics and Law ( email )

Box 605
Goteborg, 40530
Sweden

Yohannes Ayalew Birru

affiliation not provided to SSRN ( email )

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