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Monetary, Fiscal, and Structural Drivers of Inflation in Ethiopia : New Empirical Evidence from TimeSeries Analysis

Author

Listed:
  • Ndikumana,Léonce
  • Nkurunziza,Janvier D.
  • Sanchez Martin,Miguel Eduardo
  • Mulugeta,Samuel
  • Getachew Kelbore,Zerihun

Abstract

This study empirically investigates the drivers of inflation in Ethiopia using monthly data fromJuly 1998 to September 2020. It explores short-run and long-run effects of domestic and external determinants ofinflation—including demand-side, supply-side, and structural factors—using the cointegration and vector error correctionmethodology. Four measures of inflation are considered: cereals, food, nonfood, and all items consumer price indexinflation. A key contribution to the existing literature is the investigation of the role of the fiscal sector inmodeling inflation, a topic that has been neglected in the existing studies on inflation in Ethiopia. The empiricalresults show that disequilibria in the monetary sector, grains sector, and food markets have long-run effects oninflation. In the short run, inflation is driven by structural factors (notably, cereal output gaps and importedinflation) as well as demand-side factors (notably, money growth and public sector borrowing). The results hold whenthe analysis is limited to the high growth period from 2005 onward, following the end of the International Monetary Fundprogram in the country. The evidence provides valuable insights in the context of ongoing macroeconomic policyreforms in Ethiopia.

Suggested Citation

  • Ndikumana,Léonce & Nkurunziza,Janvier D. & Sanchez Martin,Miguel Eduardo & Mulugeta,Samuel & Getachew Kelbore,Zerihun, 2021. "Monetary, Fiscal, and Structural Drivers of Inflation in Ethiopia : New Empirical Evidence from TimeSeries Analysis," Policy Research Working Paper Series 9881, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9881
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    References listed on IDEAS

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    Keywords

    Inflation; Financial Sector Policy; Natural Disasters; Food Security; Energy and Mining; Energy and Environment; Energy Demand;
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