Inflation in Ethiopia

Pablo Andrés Neumeyer (), Martín González-Rozada () and Can Soylu ()

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: This paper documents that monetary financing of unfunded fiscal deficits drives inflation in Ethiopia, a country with moderate but persistent inflation, which averaged 14% for the period 2002-2021. We make the case for the fiscal-monetary origin of inflation in two steps. First, we estimate a long-run money demand function for the monetary aggregate M1, which supports the quantity theory of money. Second, we show that over 2002-2021, 98% of the increase in M1 is explained by the growth of the monetary base, which, in turn, is explained by the growth of central bank transfers to the treasury and state-owned enterprises. These transfers account for 91% of the growth of M1 over the period 2002-2021.

Keywords: Inflation; Money Demand; Fiscal Dominance; Ethiopia (search for similar items in EconPapers)
JEL-codes: E31 E50 E62 E65 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2024-06
New Economics Papers: this item is included in nep-cba, nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2025_05

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