DETERMINANTS OF INFLATION IN ETHIOPIA: AN ECONOMETRIC ANALYSIS USING ARDL BOUNDS TESTING APPROACH

Year 2024, Volume: 11 Issue: 2, 85 - 96, 31.12.2024

Betslot Addisu , Mullugeta Ayenalem , Kassa Yirga Bekalu

Abstract

Purpose- The main purpose of this paper is to examine the macroeconomic factors that drive inflation in Ethiopia. Nonetheless even with different economic liberalization reforms and attempts on macroeconomic level, inflation stands as one of the most crucial issues affecting the Ethiopian economy. The purpose of this study is thus to investigate circumstances that trigged inflation during the period of 2003 to 2023 in an effort to identify key sources of sustained inflation and to determine the best ways of managing it.
Methodology- This study employs the ARDL technique to analyze the determinats of inflation through various macroeconomic variables in Ethiopia. The ARDL approach is particularly suitable for examining the short-run and long-run dynamics of the variables involved. Data for this research is sourced from reputable institutions, including the NBE, the EEA, the IMF, the WB, the CSA, and the MoFD, spanning from 2003 to 2023.
Findings- The study's findings indicated that exchange rate, broad money supply, import price, government expenditure, and budget deficit all have a positive and statistically significant impact on inflation in both the long and short run. On the other hand, interest rates and GDP growth exhibit a negative effect on inflation. While interest rates have an inflationary effect in the short run, they demonstrate a deflationary impact in the long run. In the short run, the budget deficit has a negative effect on inflation, suggesting that managing fiscal imbalances can contribute to lower inflation rates.
Conclusion- This study suggests that Ethiopian policymakers should improve fiscal and monetary policies by controlling money circulation, stabilizing exchange rates, ncreasing government spending efficiency. Moreover, reinforcing the institutions and adapting to global fluctuations can further reduce inflation.

Keywords

Macroeconomic drivers, time series, ARDL model, Bond test

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