A Closer look at Exchange Rate Induced Inflation in Ethiopia

• In this paper, we examine the rate of exchange rate pass-through (ERPT) to domestic prices with a particular focus on the Ethiopian economy. We have employed a Structural Vector Autoregressive (SVAR) model where identification is achieved based on a combination of short- and long-run restrictions. The long-run identifying restrictions are derived from a simple small open economy macro model. The results from the impulse response analysis point to a pass-through rate that starts out small but steadily increases in subsequent quarters, becoming close to complete in about two years. According to the variance decomposition results, however, other macroeconomic shocks, including shocks to aggregate demand, output supply as well as shocks to foreign financial flows and trade balance appear to play an important role in explaining the variation in inflation in Ethiopia.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Keyword

Exchange Rate

Pass-through

Inflation

SVAR

Ethiopia

Economics

nationalekonomi

Publication and Content Type

vet (subject category)

ovr (subject category)