Loening, Josef L.Durevall, DickBirru, Yohannes A.2012-03-192012-03-192009-06-01https://hdl.handle.net/10986/4163Ethiopia 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 from the past decade, the authors 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. The main finding is that, in a longer perspective, over three to four years, the main factors that determine domestic food and non-food prices are the exchange rate and international food and goods prices. In the short run, agricultural supply shocks and inflation inertia strongly affect domestic inflation, causing large deviations from long-run price trends. Money supply growth does affect food price inflation in the short run, although the money stock itself does not seem to drive inflation. The results suggest the need for a multi-pronged approach to fight inflation. Forecast scenarios suggest monetary and exchange rate policies need to take into account cereal production, which 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.CC BY 3.0 IGOADVERSE EFFECTSAGGREGATE DEMANDAGRICULTURAL OUTPUTAGRICULTURAL PRICESAGRICULTUREANNUAL GROWTHARBITRAGEASSETSBALANCE OF PAYMENTSBANKING SYSTEMBARTERBLACK MARKETBLACK MARKET EXCHANGE RATEBUSINESS CYCLESCAPITAL ACCOUNTCAPITAL FLOWSCAPITAL GOODSCAPITAL INFLOWSCAPITAL MARKETSCENTRAL BANKCEREAL PRICECEREAL PRICESCHOW TESTSCLOSED ECONOMYCOFFEE PRICESCOMMERCIAL BANKCOMMERCIAL BANKSCOMMERCIALIZATIONCOMMODITY MARKETSCOMMODITY PRICECOMMODITY PRICESCOMPETITIVENESSCONSUMER BASKETCONSUMER PRICECONSUMER PRICE INDEXCONSUMER PRICESCONSUMPTION EXPENDITURECORRELATION COEFFICIENTCURRENCY DEPRECIATIONCURRENCY SUBSTITUTIONDEFLATIONDEMAND ANALYSISDEMAND FUNCTIONDEPOSITDEPOSITSDEPRECIATIONDEVALUATIONSDISCOUNT RATESDISEQUILIBRIUMDOLLAR EXCHANGE RATEDOMESTIC CURRENCYDOMESTIC DEMANDDOMESTIC GOODSDOMESTIC INFLATIONDOMESTIC INVESTORSDOMESTIC MARKETDOMESTIC PRICEDOMESTIC PRICE LEVELDOMESTIC PRICESDUMMY VARIABLEDUMMY VARIABLESDURABLE GOODSECONOMETRIC MODELECONOMIC GROWTHENDOGENOUS VARIABLEENERGY PRICEENERGY PRICESEQUILIBRIUM LEVELEQUILIBRIUM PRICESERROR CORRECTION MODELSERROR CORRECTION TERMERROR CORRECTION TERMSEURO EXCHANGE RATEEXCESS DEMANDEXCESS LIQUIDITYEXCESS SUPPLYEXCHANGE RATEEXCHANGE RATE CHANNELEXCHANGE RATE POLICIESEXCHANGE RATE POLICYEXOGENOUS SHOCKEXPENDITUREEXPLANATORY VARIABLEEXPLANATORY VARIABLESEXPORT COMPETITIVENESSEXTERNAL FACTORSEXTERNAL MARKETSFACE VALUEFINANCIAL MARKETSFISCAL POLICIESFIXED EXCHANGE RATEFIXED RATEFLOATING EXCHANGE RATEFOOD PRICEFOOD PRICESFOREIGN CURRENCYFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETFOREIGN EXCHANGE RATEFOREIGN EXCHANGE RESERVESFOREIGN RESERVESFUTURE INFLATIONGDPGROWTH RATEGROWTH RATESHIGH INFLATIONIMBALANCESIMPORTIMPORT PRICEIMPORTSINCOMEINDEXATIONINFLATIONINFLATION DYNAMICSINFLATION EXPECTATIONSINFLATIONARY EXPECTATIONSINTEREST RATEINTEREST RATESINTERMEDIATE GOODSINTERMEDIATE PRODUCTSINTERNATIONAL CAPITAL MARKETSINTERNATIONAL MARKETINTERNATIONAL PRICESINTERNATIONAL TRADEINVESTMENT OPPORTUNITIESLOCAL CURRENCYLONG-RUN EQUILIBRIUMLOW INTEREST RATESLOW-INCOME COUNTRIESMACROECONOMIC PERFORMANCEMACROECONOMIC POLICYMARKET CONDITIONSMARKET DISTORTIONSMARKET EQUILIBRIUMMARKET INTEGRATIONMARKET PRICESMARKET SHAREMARKET STRUCTUREMARKETINGMICROECONOMIC ANALYSISMONETARY POLICIESMONETARY POLICYMONETARY TRANSMISSIONMONEY DEMANDMONEY DEMAND FUNCTIONMONEY HOLDINGSMONEY MARKETMONEY MARKETSMONEY STOCKMONEY SUPPLYNATIONAL BANKNOMINAL EXCHANGE RATEOIL PRICEOIL PRICE INFLATIONOPEN ECONOMYOUTPUT GAPPARALLEL EXCHANGE RATEPARALLEL MARKETPARALLEL MARKET RATEPHILLIPS CURVEPOVERTY REDUCTIONPRICE ADJUSTMENTSPRICE CHANGESPRICE DYNAMICSPRICE FLEXIBILITYPRICE FLUCTUATIONSPRICE HIKEPRICE INCREASEPRICE INCREASESPRICE INDEXESPRICE INDICESPRICE INFLATIONPRICE LEVELPRICE LEVELSPRICE SETTINGPRICE TRENDSPRODUCER PRICESPUBLIC INVESTMENTSRANDOM WALKRAPID GROWTHRAPID INFLATIONRATE OF INFLATIONREAL EFFECTIVE EXCHANGE RATEREAL EXCHANGE RATEREAL IMPORTSREAL INTEREST RATEREGIONAL MARKETSRELATIVE PRICERELATIVE PRICESROBUSTNESS CHECKSTABLE EXCHANGE RATESTRUCTURAL REFORMSSUBSTITUTIONSUPPLY SHOCKSSUPPLY-SIDET-VALUETIGHT MONETARY POLICYTOTAL EXPORTSTRADABLE GOODSTRADE DEFICITSTRADE PATTERNTRADING PARTNERTRADING PARTNERSTRANSMISSION MECHANISMTRANSMISSION MECHANISMSTRANSPORTATION COSTSTREASURY BILLTREASURY BILLSUNCERTAINTIESUNCERTAINTYUNEMPLOYMENTVOLATILITYWEIGHTSWHOLESALE PRICESWHOLESALERSWORLD MARKETWORLD MARKETSWORLD PRICESWorld Bank10.1596/1813-9450-4969