Geda, Alemayehu (PhD)Tafere, Kibrom2021-09-102023-11-192021-09-102023-11-192008-06http://etd.aau.edu.et/handle/12345678/27851One of the prime objectives of governments is achieving stable macroeconomic condition. This objective requires that prices be kept to a reasonably stable level. High and persistent inflation introduces uncertainties into the economy and may lead to slowdown of economic growth by discouraging domestic as well as foreign investments. It may also cause balance of payments problems by eroding a country's competitive advantage. Moreover, because it hits the poor the most it needs to be tackled. This study aims at understanding the forces behind the current inflationary process in Ethiopia. In order to achieve the stated objective a synthesis model of monetarist and cost-push inflation theories is estimated using vector autoregressive (VAR) and single equation error correction models. The estimated models enable to understand the short run and the long run price dynamics in Ethiopia between 1994/95 and 2007/08. The findings of the study suggest that the determinants of inflation differ between sectors (food and non-food) and the time horizons under consideration. The most important forces behind food inflation in the long run are real income, money supply, inflation expectation and international food price. The long run determinants of non-food inflation, on the other hand, are money supply, interest rate and inflation expectations. In the short run model, wages, international prices, exchange rates and food supply are found to be prime sources of inflation. There is also evidence of cost mark-up in the short run suggesting the presence of strong monopoly power in price formation. To contain inflation, therefore, the government needs to exercise prudent fiscal and monetary policies. Inflation expectations need to be tackled by way of credible government policies to change public opinion_ In this regard it is important to consider targeting of macroeconomic variables and adhere to announced targets.enExperience in EthiopiaSources of the Recent InflationaryThesis