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Inflation Dynamics and Food Prices in Ethiopia

  • Durevall, Dick

    ()

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Loening, Josef L.

    (World Bank)

  • Birru, Yohannes A.

    (National Bank of Ethiopia)

During the global food crisis, Ethiopia experienced an unprecedented increase in inflation, among the highest in Africa. Using monthly data over the past decade, we estimate models of inflation to identify the importance of the factors contributing to CPI inflation and three of its major components: cereal prices, food prices, and non-food prices. Our main finding is that movements in international food and goods prices, measured in domestic currency, determined the long-run evolution of domestic prices. In the short run, agricultural supply shocks affected food inflation, causing large deviations from long-run price trends. Monetary policy seems to have accommodated price shocks, but money supply growth affected short-run non-food price inflation. Our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices, world food prices and domestic agricultural production should be considered. Omitting these factors can lead to biased results and misguided policy decisions.

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File URL: http://hdl.handle.net/2077/24038
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 478.

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Length: 46 pages
Date of creation: 09 Dec 2010
Date of revision: 03 Jun 2013
Handle: RePEc:hhs:gunwpe:0478
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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