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Working Paper 151 - The Dynamics of Inflation in Ethiopia and Kenya

This study provides an assessment of the main drivers of inflation in Ethiopia and Kenya by developing single-equation error correction models for the Consumer Price Index in each country. This approach takes into account a number of potential sources of the recent surge in inflation, including excess money supply, exchange rates, food and non-food world prices, world energy prices and domestic agricultural supply shocks. We find that the inflation rates in both Ethiopia and Kenya are driven by similar factors; world food prices and exchange rates have a long run impact, while money growth and agricultural supply shocks have short-to-medium run effects. There is also evidence of substantial inflation inertia in both countries. The key conclusion is that there is no nominal anchor for inflation in either country in the form of a clear and well-functioning monetary or exchange rate policy.

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Paper provided by African Development Bank in its series Working Paper Series with number 400.

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Date of creation: 09 Sep 2012
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Handle: RePEc:adb:adbwps:400
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  1. Mame Astou Diouf, 2007. "Modeling Inflation for Mali," IMF Working Papers 07/295, International Monetary Fund.
  2. Kenji Moriyama, 2008. "Investigating Inflation Dynamics in Sudan," IMF Working Papers 08/189, International Monetary Fund.
  3. Angel J. Ubide, 1997. "Determinants of Inflation in Mozambique," IMF Working Papers 97/145, International Monetary Fund.
  4. Rodolphe Blavy, 2004. "Inflation and Monetary Pass-Through in Guinea," IMF Working Papers 04/223, International Monetary Fund.
  5. Tidiane Kinda, 2011. "Modeling Inflation in Chad," IMF Working Papers 11/57, International Monetary Fund.
  6. Ansgar Belke & Thorsten Polleit, 2006. "Money and Swedish Inflation Reconsidered," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 270/2006, Department of Economics, University of Hohenheim, Germany.
  7. Olusanya E. Olubusoye & Rasheed Oyaromade, 2008. "Modelling the Inflation Process in Nigeria," Research Papers RP_182, African Economic Research Consortium.
  8. Durevall, Dick & Loening, Josef L. & Birru, Yohannes A., 2010. "Inflation Dynamics and Food Prices in Ethiopia," Working Papers in Economics 478, University of Gothenburg, Department of Economics, revised 03 Jun 2013.
  9. Shanaka J. Peiris & Régis Barnichon, 2007. "Sources of Inflation in Sub-Saharan Africa," IMF Working Papers 07/32, International Monetary Fund.
  10. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
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