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Inflation in Ethiopia

Author

Listed:
  • Pablo Andrés Neumeyer
  • Martín González-Rozada
  • Can Soylu

Abstract

This paper documents that monetary financing of unfunded fiscal deficits drives inflation in Ethiopia, a country with moderate but persistent inflation, which averaged 14% for the period 2002-2021. We make the case for the fiscal-monetary origin of inflation in two steps. First, we estimate a long-run money demand function for the monetary aggregate M1, which supports the quantity theory of money. Second, we show that over 2002-2021, 98% of the increase in M1 is explained by the growth of the monetary base, which, in turn, is explained by the growth of central bank transfers to the treasury and state-owned enterprises. These transfers account for 91% of the growth of M1 over the period 2002-2021.

Suggested Citation

  • Pablo Andrés Neumeyer & Martín González-Rozada & Can Soylu, 2024. "Inflation in Ethiopia," Department of Economics Working Papers 2025_05, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_05
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    References listed on IDEAS

    as
    1. Benati, Luca & Lucas, Robert E. & Nicolini, Juan Pablo & Weber, Warren, 2021. "International evidence on long-run money demand," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 43-63.
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    4. James H. Stock & Mark W. Watson, 2016. "Core Inflation and Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 770-784, October.
    5. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    6. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-1048, November.
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    8. Fernando Alvarez & Martin Beraja & Martín Gonzalez-Rozada & Pablo Andrés Neumeyer, 2019. "From Hyperinflation to Stable Prices: Argentina’s Evidence on Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 451-505.
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    More about this item

    Keywords

    Inflation; Money Demand; Fiscal Dominance; Ethiopia;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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