The Dynamics of Inflation In Ethiopia

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title




Traditional economic theories like keynesianism and monetarism ascribed inflation basically to be a demand side phenomenon. This arises from their basic premeses that there are well-developed and integrated product, labour and financial markets. Policy variables such as interest rates, exchange rates, and money supply could, therefore, be effectively employed to influence policy targets. For keynesians inflation is '\ disequillibrium in the product market due to the optimistic behavior of investors or government to spend beyond the full employment level. For monetarists, on the other hand, inflation arises due to a disequilibruim in the money market when the money supply goes beyond the demand for it. The Phillips Curve which basis itself on these theories is, therefore, a demand side theory. Things are, however, different in Ethiopia Production is predominately agrarian. Markets are fragmented and underdeveloped. Productivity is low. And, production is constrained by structural rigidities. Internal and external shocks subjected the supply curve to a repeated contraction. The actual production function is, therefore, well below the potential (steady state) level. Removing structural rigidities, and creating well functioning and integrated markets is urgent to eliminate supply bottlenecks. Each step to remove the bottlenecks is expected to produce a continuous rightward shift in the aggregate supply curve. This means that when unemployment declines inflation also declines. The Phillips Curve is, therefore, positive. This is what is evident in Ethiopia. However, when an efficient market system is established and resources begin to be exposed to a competitive market system, money will finish its business as a producer good and inflation begins to be 'a demand side phenomenon.



Dynamics, Inflation In Ethiopia