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Inflation dynamics and food prices in an agricultural economy : the case of Ethiopia

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  • Loening, Josef L.
  • Durevall, Dick
  • Birru, Yohannes A.

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 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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4969.

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Date of creation: 01 Jun 2009
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Handle: RePEc:wbk:wbrwps:4969

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Keywords: Markets and Market Access; Currencies and Exchange Rates; Economic Theory&Research; Food&Beverage Industry; Emerging Markets;

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Citations

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Cited by:
  1. Durevall, Dick & Loening, Josef, 2009. "Ethiopia: Updated Inflation Forecasts," MPRA Paper 25899, University Library of Munich, Germany.
  2. Baltzer, Kenneth, 2013. "International to domestic price transmission in fourteen developing countries during the 2007-08 food crisis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Maes, Kenneth & Kalofonos, Ippolytos, 2013. "Becoming and remaining community health workers: Perspectives from Ethiopia and Mozambique," Social Science & Medicine, Elsevier, vol. 87(C), pages 52-59.
  4. Minten, Bart & Stifel, David & Tamru, Seneshaw, 2012. "Structural transformation in Ethiopia: Evidence from cereal markets:," ESSP working papers 39, International Food Policy Research Institute (IFPRI).
  5. Josef L. Loening & Masato Higashi, 2010. "Decomposing Terms of Trade Fluctuations in Ethiopia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 205, Ibero-America Institute for Economic Research.
  6. Yonas Alem & Måns Söderbom, 2010. "Household-Level Consumption in Urban Ethiopia: The Impact of Food Price Inflation and Idiosyncratic Shocks," CSAE Working Paper Series 2010-24, Centre for the Study of African Economies, University of Oxford.
  7. Hadley, Craig & Stevenson, Edward Geoffrey Jedediah & Tadesse, Yemesrach & Belachew, Tefera, 2012. "Rapidly rising food prices and the experience of food insecurity in urban Ethiopia: Impacts on health and well-being," Social Science & Medicine, Elsevier, vol. 75(12), pages 2412-2419.
  8. Durevall, Dick & Loening, Josef L. & Ayalew Birru, Yohannes, 2013. "Inflation dynamics and food prices in Ethiopia," Journal of Development Economics, Elsevier, vol. 104(C), pages 89-106.
  9. Christopher Adam & David Kwimbere & Wilfred Mbowe & Stephen O’Connell, 2012. "Working Paper 163 - Food Prices and Inflation in Tanzania," Working Paper Series 441, African Development Bank.
  10. Mezgebo, Taddese, 2009. "A multivariate approach for identification of optimal locations with in Ethiopia’s wheat market to tackle soaring inflation on food price," MPRA Paper 18663, University Library of Munich, Germany.
  11. Alem, Yonas & Köhlin, Gunnar & Stage, Jesper, 2012. "The Persistence of Subjective Poverty in Urban Ethiopia," Working Papers in Economics 549, University of Gothenburg, Department of Economics.
  12. Tidiane Kinda, 2011. "Modeling Inflation in Chad," IMF Working Papers 11/57, International Monetary Fund.
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  14. SENBETA, Sisay Regassa, 2012. "How important are external shocks in explaining growth in Sub-Saharan Africa? Evidence from a Bayesian VAR," Working Papers 2012010, University of Antwerp, Faculty of Applied Economics.
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  16. James Heintz & Léonce Ndikumana, 2010. "Is There a Case for Formal Inflation Targeting in Sub-Saharan Africa?," Working Papers wp218, Political Economy Research Institute, University of Massachusetts at Amherst.
  17. Minot, Nicholas, 2011. "Transmission of world food price changes to markets in Sub-Saharan Africa:," IFPRI discussion papers 1059, International Food Policy Research Institute (IFPRI).
  18. Admassie, Assefa, 2013. "The political economy of food price: The case of Ethiopia," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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