Exploring the Possibility Of Implementing Inflation Targeting Approach In Ethiopia: An Empirical Analysis

Course ID
Ethiopian Economics Association (EEA)
Muluken Kassahun

This study devoted its attention to assess the possibility of implementing inflation targeting framework of monetary policy in Ethiopia, which has a promising result as observed from the experience of countries, which adopt inflation targeting monetary policy framework. In order to investigate the possibility of implementing inflation targeting, some practical issues are assessed empirically.The possible non‐linear relationship between economic growth and inflation is estimated through threshold model in order to indicate the optimal rate of inflation that can be conductive for economic growth. The estimated result of threshold model indicates that inflation lesser than 13 percent rate may be positively associated with economic growth and the relationship turns to negative if inflation is greater than 13 percent rate. This result might be useful for any inflation‐controlling attempt, particularly to target inflation, in order to consider its cost in terms of economic growth.With the view to investigate the very nature of inflation, the short run and long run determinants of inflation are discovered through cointegration and error correction modeling. The finding of the study reveals that agriculture sector supply shocks and monetary expansion play a significant role in determining the inflation rate in the long run. In the short run, price expectation, Agriculture supply shocks, service sector demand, monetary expansion, and the amount of rainfall are the factors that are found to have potential influence on domestic price level. The fulfillment of one of the preconditions of inflation targeting, which is the existence of stable and predictable relationship between inflation and monetary policy instruments is statistically analyzed through innovation accounting. The study explored the weak linkage between monetary policy instruments and inflation. Further, the study asserts that inflation is highly determined by future price expectation, which calls for credible policy that can Potentially subdue the expected future price level.

Corporate Author:Getnet Alemu, Worku Gebeyehu, Demirew Getachew (Editors) & Ethiopian Economic Association (EEA)
Publisher:Ethiopian Economic Association (EEA)
Primary Descriptors:Threshold Inflation

Secondary Descriptor:Dynamics of Inflation

Geographic Descriptors:Ethiopia
Cataloge Date:03/11/2015
Broad Subject heading:Inflation – Ethiopia
Call Number:330.963 PRO 2014
Serial Key Title:Proceedings of the Eleventh International Conference on the Ethiopian Economy
Publication catagory:International Conference
Content type:EEA Publication
Publication date:2014-06-02 00:00:00
Forum or Discussion date:2013-07-17 00:00:00
Place of publication:Addis Ababa, Ethiopia
Type of material:Book
Current frequency:Annually
Author: Muluken Kassahun