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Inflation Dynamics and Food Prices in Ethiopia

Journal article
Authors Dick Durevall
J.L. Loening
Y.A. Birru
Published in Journal of Development Economics
Volume 104
Pages 89-106
ISSN 0304-3878
Publication year 2013
Published at Gothenburg Centre for Globalization and Development (GCGD)
Department of Economics
Pages 89-106
Language en
Links dx.doi.org/10.1016/j.jdeveco.2013.0...
Keywords Commodity prices; Ethiopia; Food policy; Food prices; Global food price crisis; Monetary policy
Subject categories Economics

Abstract

During the global food crisis, Ethiopia experienced an unprecedented increase in inflation, among the highest in Africa. Using monthly data over the past decade, we estimate models of inflation to identify the importance of the factors contributing to CPI inflation and three of its major components: cereal prices, food prices, and non-food prices. Our main finding is that movements in international food and goods prices, measured in domestic currency, determined the long-run evolution of domestic prices. In the short run, agricultural supply shocks affected food inflation, causing large deviations from long-run price trends. Monetary policy seems to have accommodated price shocks, but money supply growth affected short-run non-food price inflation. Our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices, world food prices and domestic agricultural production should be considered. Omitting these factors can lead to biased results and misguided policy decisions.

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