Modeling Inflation Dynamics In Ethiopia

This study examines the dynamics of the inflation in the long and short term using econometricrn"rntechniques of co integration tests and error correction modeling for the period 1992:4 to 2007:2.rnThe empirical results show that the price index, real gross domestic product, broad money,rnrnofficial exchange rate and world price are co integrated. They also indicate that in the long termrnthe world price index and real gross domestic product are the strongest in affecting inflation inrnEthiopia. On the other hand, the money Supply is the strongest in pushing inflation up in the Irnshort term. The long term effect of official exchange rate is insignificant while it has the next Irnstrong effect in the short term.rn The important implication of the study is, hence; first, controllingrnthe money supply and exchange rate to control inflation in the short term and, second, increasingrnproduction and keeping the economy from possible world price shocks are good instruments inrnthe long term attempt of controlling inflation.

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