The Dynamics of Inflationary Process in Ethiopia
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Date
1997-06
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A.A.U
Abstract
This paper made an attempt to explain, among other things, the dynamics of
inflationary process and, hence, give insights as to how to manage the
inflationary process in the country. To investigate this issue we employ both
statistical as well as econometric methods. To look at the specific determinants
of inflation we model the country's inflation process from the monetarist as well
as the structuralist view. Moreover, to capture the relative sectoral differences
in response to changes in some of the important macroeconomic variables, we
classify the economy into the agricultural and non agricultural sectors and model
the respective sectors accordingly.
Based on this procedures we found out that inflation in the country is generally
a supply rather than a demand side phenomenon. In addition to this, we notice
that the monetarist argument that inflation has a one- to c one correspondence to
changes in broad money supply does not hold in our case. What we notice is that
even under steady state equilibrium situation, the impact of broad money supply
on the inflationary process in the country is very minimal. We proceed and apply
the structuralist model and found out that the lion's share of the variation in the
inflationary process in the country is explained by this model. Here, we found out
that, on top of the monetarist variables, especially income, the variation in
inflation is influenced by structural as well as institutional factors. Specifically,
we observe that the long run inflationary process is found to be determined by
real income, import prices and government deficit level. In the short run, on the
other hand, in addition to the above variations in broad money supply and rain
fall play an important role in the inflationary process of the country. in line with
the structuralists' argument we also found out that there are, indeed, sectoral
differences in response to changes in some of the macro economic variables.
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Keywords
Dynamics, Inflationary Process