Modeling Inflation Dynamics in Ethiopia

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This study examines the dynamics of the inflation in the long and short term using econometric " techniques of co integration tests and error correction modeling for the period 1992:4 to 2007:2. The empirical results show that the price index, real gross domestic product, broad money, official exchange rate and world price are co integrated. They also indicate that in the long term the world price index and real gross domestic product are the strongest in affecting inflation in Ethiopia. On the other hand, the money Supply is the strongest in pushing inflation up in the I short term. The long term effect of official exchange rate is insignificant while it has the next I strong effect in the short term. The important implication of the study is, hence; first, controlling the money supply and exchange rate to control inflation in the short term and, second, increasing production and keeping the economy from possible world price shocks are good instruments in the long term attempt of controlling inflation.



Dynamics in Ethiopia