| dc.description.abstract | Ethiopia has experienced a historically unprecedented increase in inflation, mainly driven by
cereal price inflation, which is among the highest in Sub-Saharan Africa. Using monthly data
over the past decade, we estimate error correction models to identify the relative importance of
several factors contributing to overall inflation and its three major components, cereal prices,
food prices and non-food prices. Our main finding is that, in the long run, domestic food and
non-food prices are determined by the exchange rate and international food and goods prices.
In the short to medium run, agricultural supply shocks and inflation inertia strongly affect
domestic inflation, causing large deviations from long-run price trends. Money supply growth
affects food price inflation in the short run, though excess money supply does not seem to drive
inflation in the long run. Our results suggest a challenging time ahead for Ethiopia, with the
need for a multipronged approach to fight inflation. Forecast scenarios suggest monetary and
exchange rate policies need to take into account the cereal sector, as food staple growth is
among the key determinants of inflation, assuming a decline in global commodity prices.
Implementation of successful policies will be contingent on the availability of foreign exchange
and the performance of agriculture. | en |
