Inflation Dynamics and Food Prices in an Agricultural Economy : The Case of Ethiopia

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 from the past decade, the authors 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. The main finding is that, in a longer perspective, over three to four years, the main factors that determine domestic food and non-food prices are the exchange rate and international food and goods prices. In the short run, agricultural supply shocks and inflation inertia strongly affect domestic inflation, causing large deviations from long-run price trends. Money supply growth does affect food price inflation in the short run, although the money stock itself does not seem to drive inflation. The results suggest the need for a multi-pronged approach to fight inflation. Forecast scenarios suggest monetary and exchange rate policies need to take into account cereal production, which 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.

Bibliographic Details

Main Authors:	Loening, Josef L., Durevall, Dick, Birru, Yohannes A.
Language:	English
Published:	2009-06-01
Subjects:	ADVERSE EFFECTS, AGGREGATE DEMAND, AGRICULTURAL OUTPUT, AGRICULTURAL PRICES, AGRICULTURE, ANNUAL GROWTH, ARBITRAGE, ASSETS, BALANCE OF PAYMENTS, BANKING SYSTEM, BARTER, BLACK MARKET, BLACK MARKET EXCHANGE RATE, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL FLOWS, CAPITAL GOODS, CAPITAL INFLOWS, CAPITAL MARKETS, CENTRAL BANK, CEREAL PRICE, CEREAL PRICES, CHOW TESTS, CLOSED ECONOMY, COFFEE PRICES, COMMERCIAL BANK, COMMERCIAL BANKS, COMMERCIALIZATION, COMMODITY MARKETS, COMMODITY PRICE, COMMODITY PRICES, COMPETITIVENESS, CONSUMER BASKET, CONSUMER PRICE, CONSUMER PRICE INDEX, CONSUMER PRICES, CONSUMPTION EXPENDITURE, CORRELATION COEFFICIENT, CURRENCY DEPRECIATION, CURRENCY SUBSTITUTION, DEFLATION, DEMAND ANALYSIS, DEMAND FUNCTION, DEPOSIT, DEPOSITS, DEPRECIATION, DEVALUATIONS, DISCOUNT RATES, DISEQUILIBRIUM, DOLLAR EXCHANGE RATE, DOMESTIC CURRENCY, DOMESTIC DEMAND, DOMESTIC GOODS, DOMESTIC INFLATION, DOMESTIC INVESTORS, DOMESTIC MARKET, DOMESTIC PRICE, DOMESTIC PRICE LEVEL, DOMESTIC PRICES, DUMMY VARIABLE, DUMMY VARIABLES, DURABLE GOODS, ECONOMETRIC MODEL, ECONOMIC GROWTH, ENDOGENOUS VARIABLE, ENERGY PRICE, ENERGY PRICES, EQUILIBRIUM LEVEL, EQUILIBRIUM PRICES, ERROR CORRECTION MODELS, ERROR CORRECTION TERM, ERROR CORRECTION TERMS, EURO EXCHANGE RATE, EXCESS DEMAND, EXCESS LIQUIDITY, EXCESS SUPPLY, EXCHANGE RATE, EXCHANGE RATE CHANNEL, EXCHANGE RATE POLICIES, EXCHANGE RATE POLICY, EXOGENOUS SHOCK, EXPENDITURE, EXPLANATORY VARIABLE, EXPLANATORY VARIABLES, EXPORT COMPETITIVENESS, EXTERNAL FACTORS, EXTERNAL MARKETS, FACE VALUE, FINANCIAL MARKETS, FISCAL POLICIES, FIXED EXCHANGE RATE, FIXED RATE, FLOATING EXCHANGE RATE, FOOD PRICE, FOOD PRICES, FOREIGN CURRENCY, FOREIGN EXCHANGE, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE RATE, FOREIGN EXCHANGE RESERVES, FOREIGN RESERVES, FUTURE INFLATION, GDP, GROWTH RATE, GROWTH RATES, HIGH INFLATION, IMBALANCES, IMPORT, IMPORT PRICE, IMPORTS, INCOME, INDEXATION, INFLATION, INFLATION DYNAMICS, INFLATION EXPECTATIONS, INFLATIONARY EXPECTATIONS, INTEREST RATE, INTEREST RATES, INTERMEDIATE GOODS, INTERMEDIATE PRODUCTS, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL MARKET, INTERNATIONAL PRICES, INTERNATIONAL TRADE, INVESTMENT OPPORTUNITIES, LOCAL CURRENCY, LONG-RUN EQUILIBRIUM, LOW INTEREST RATES, LOW-INCOME COUNTRIES, MACROECONOMIC PERFORMANCE, MACROECONOMIC POLICY, MARKET CONDITIONS, MARKET DISTORTIONS, MARKET EQUILIBRIUM, MARKET INTEGRATION, MARKET PRICES, MARKET SHARE, MARKET STRUCTURE, MARKETING, MICROECONOMIC ANALYSIS, MONETARY POLICIES, MONETARY POLICY, MONETARY TRANSMISSION, MONEY DEMAND, MONEY DEMAND FUNCTION, MONEY HOLDINGS, MONEY MARKET, MONEY MARKETS, MONEY STOCK, MONEY SUPPLY, NATIONAL BANK, NOMINAL EXCHANGE RATE, OIL PRICE, OIL PRICE INFLATION, OPEN ECONOMY, OUTPUT GAP, PARALLEL EXCHANGE RATE, PARALLEL MARKET, PARALLEL MARKET RATE, PHILLIPS CURVE, POVERTY REDUCTION, PRICE ADJUSTMENTS, PRICE CHANGES, PRICE DYNAMICS, PRICE FLEXIBILITY, PRICE FLUCTUATIONS, PRICE HIKE, PRICE INCREASE, PRICE INCREASES, PRICE INDEXES, PRICE INDICES, PRICE INFLATION, PRICE LEVEL, PRICE LEVELS, PRICE SETTING, PRICE TRENDS, PRODUCER PRICES, PUBLIC INVESTMENTS, RANDOM WALK, RAPID GROWTH, RAPID INFLATION, RATE OF INFLATION, REAL EFFECTIVE EXCHANGE RATE, REAL EXCHANGE RATE, REAL IMPORTS, REAL INTEREST RATE, REGIONAL MARKETS, RELATIVE PRICE, RELATIVE PRICES, ROBUSTNESS CHECK, STABLE EXCHANGE RATE, STRUCTURAL REFORMS, SUBSTITUTION, SUPPLY SHOCKS, SUPPLY-SIDE, T-VALUE, TIGHT MONETARY POLICY, TOTAL EXPORTS, TRADABLE GOODS, TRADE DEFICITS, TRADE PATTERN, TRADING PARTNER, TRADING PARTNERS, TRANSMISSION MECHANISM, TRANSMISSION MECHANISMS, TRANSPORTATION COSTS, TREASURY BILL, TREASURY BILLS, UNCERTAINTIES, UNCERTAINTY, UNEMPLOYMENT, VOLATILITY, WEIGHTS, WHOLESALE PRICES, WHOLESALERS, WORLD MARKET, WORLD MARKETS, WORLD PRICES,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090618133717 https://hdl.handle.net/10986/4163
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