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Inflationary Expectations In Ethiopia: Some Preliminary Results

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  • LOENING, Josef

    ()

  • TAKADA, Hideki

    ()

Abstract

We analyze short-run dynamics of inflation in Ethiopia, using a parsimonious error-correction model fitted with monthly observations. Our findings show that increased money supply and the nominal exchange rate significantly affect inflation in the short-run. Agricultural output shocks, proxied by a cereal-weighted agricultural production index, are also important. By providing an accommodative financial environment, our findings suggest that monetary policy in Ethiopia triggers price inertia, which has large and persistent effects. A simulation suggests that monetary policy alone may be unfeasible to control inflation effectively. To circumvent an extreme tightening with discouraging impacts on growth, additional measures are needed. These should improve the transparency and credibility of monetary policy, and reduce structural barriers that affect price formation and market efficiency.

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Bibliographic Info

Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 8 (2008)
Issue (Month): 2 ()
Pages: 159-176

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Handle: RePEc:eaa:aeinde:v:8:y:2008:i:2_13

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Related research

Keywords: Ethiopia; Error-correction Model; Inflation; Inertia.;

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  1. Almeida Neto, Heitor Vieira de & Bonomo, Marco Antônio Cesar, 1999. "Optimal State-Dependent Rules, Credibility, and Inflation Inertia," Economics Working Papers (Ensaios Economicos da EPGE) 349, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
  2. Alexis Anagnostopoulos & Italo Bove & Karl Schlag & Omar Licandro, 2006. "An Evolutionary Theory of Inflation Inertia," Working Papers 2006-25, FEDEA.
  3. Nicoletta Batini & Edward Nelson, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," Discussion Papers 06, Monetary Policy Committee Unit, Bank of England.
  4. Conrad, C. & Karanasos, M., 2005. "On the inflation-uncertainty hypothesis in the USA, Japan and the UK: a dual long memory approach," Japan and the World Economy, Elsevier, vol. 17(3), pages 327-343, August.
  5. Durevall, Dick & Ndung'u, Njuguna S., 1998. "A Dynamic Model of Inflation for Kenya 1974 - 1996," Working Papers in Economics 7, University of Gothenburg, Department of Economics.
  6. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
  7. Dexter, Albert S. & Levi, Maurice D. & Nault, Barrie R., 2002. "Sticky prices: the impact of regulation," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 797-821, May.
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