Determinants of Inflation in Ethiopia: A Time-Series Analysis

Abstract

The objective of this study was to examine the major determinants of inflation in Ethiopia using data for the period from 1975 to 2014. The study employed the ordinary least square method to test for the existence of a short-run and long-run relationship between inflation and its determinant variables. The co-integrating regression considers only the long-run property of the model, and does not deal with the short-run dynamics explicitly. For this, the error correction from the long run determinants of inflation is then used as a dynamic model to estimate the short run determinants of inflation. The exceptional empirical result of this study is that the GDP is significantly and positively affect inflation rate both in the short and long-run. The explanatory variables accounted for 98 percent of the variation of inflation during the study period. This study suggests that broad money supply is to be controlled and gross national saving is to be encouraged to reduce inflation in the country.