DETERMINANTS OF INFLATION IN ETHIOPIA: EVIDENCE FROM REGIONAL INFLATION PANEL DATA

Abstract

Maintaining stable level of inflation rate has become one of the prime macroeconomic objectives of National Bank of Ethiopia in recent years since inflationary pressure has increased onward of 2003. The impact and magnitude of inflationary pressure also varies across regions in the country. As high and persistent inflation introduces uncertainties into the economy and may lead to slowdown of economic growth by discouraging domestic as well as foreign investments most importantly affecting the consumption pattern and saving by reducing real income. Thus, factors contributing for this inflationary pressure should be properly identified and needs to be tackled. The main objective of this study is to identify the determinants of regional inflation in Ethiopia. In order to achieve this objective, panel dataset over the period 2003-2015 from seven regions were collected and analyzed using System Generalized Method of Moment (System GMM) model. The finding of the study indicated that regional inflation was negatively influenced by regional real interest rate and positively by exchange rate. The study recommended to adopt regional real interest rate as a policy instruments to tackle the impact of inflation.