Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 347: Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia
Josef L. Loening, Dick Durevall () and Yohannes Ayalew Birru
Additional contact information
Josef L. Loening: World bank
Dick Durevall: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Yohannes Ayalew Birru: University of Sussex
Abstract: Ethiopia has experienced a historically unprecedented increase in inflation, mainly driven by cereal price inflation, which is among the highest in Sub-Saharan Africa. Using monthly data over the past decade, we estimate error correction models to identify the relative importance of several factors contributing to overall inflation and its three major components, cereal prices, food prices and non-food prices. Our main finding is that, in the long run, domestic food and non-food prices are determined by the exchange rate and international food and goods prices. In the short to medium run, agricultural supply shocks and inflation inertia strongly affect domestic inflation, causing large deviations from long-run price trends. Money supply growth affects food price inflation in the short run, though excess money supply does not seem to drive inflation in the long run. Our results suggest a challenging time ahead for Ethiopia, with the need for a multipronged approach to fight inflation. Forecast scenarios suggest monetary and exchange rate policies need to take into account the cereal sector, as food staple growth is among the key determinants of inflation, assuming a decline in global commodity prices. Implementation of successful policies will be contingent on the availability of foreign exchange and the performance of agriculture.
Keywords: Agriculture; Cointegration analysis; Ethiopia; Exchange rate; Money demand; Food prices; Forecast; Inertia; Inflation
58 pages, February 23, 2009
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