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Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia

Josef L. Loening, Dick Durevall () and Yohannes Ayalew Birru
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Josef L. Loening: World bank
Yohannes Ayalew Birru: University of Sussex

No 347, Working Papers in Economics from University of Gothenburg, Department of Economics

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.

Keywords: Agriculture; Cointegration analysis; Ethiopia; Exchange rate; Money demand; Food prices; Forecast; Inertia; Inflation (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 O55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-agr, nep-dev and nep-mac
Date: 2009-02-23
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