The Dynamics of Inflation In Ethiopia
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Date
2000-06
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A.A.U
Abstract
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.
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Keywords
Dynamics, Inflation In Ethiopia