Macroeconomic Drivers of Inflation and Monetary Policy in Ethiopian Economy

: Structural VAR Approach

Résumé

Inflation has recently become a major obstacle to the Ethiopian macroeconomic stability. As a result, there is an increasing interest in identifying the sources and dynamics of inflation in the country. This study investigates the macroeconomic drivers of inflation and monetary policy interaction in the Ethiopian economy using
quarterly data from 2007q1 to 2024q2. A structural VAR model with Cholesky
decomposition was employed. The results of our SVAR analysis reveal that monetary expansion, nominal effective exchange rate, real GDP, and EU real GDP have a positive impact on inflation, while trade openness index has negative impact at all periods of the study. In addition, the source of inflation volatility is from EU real GDP, inflation inertia, world commodity price, real GDP, money supply, nominal effective exchange rate, and trade openness index, respectively. Overall, domestic macroeconomic variables such as real GDP, nominal effective exchange rate and monetary policy are vital for immediate control of inflation while exter-nal shocks and global interdependencies significantly shape inflation trends with delayed impact in Ethiopian economy. Therefore, effective inflation management should consider strategies to reduce external vulnerability, trade liberalization, and structural economic reforms alongside conventional monetary policy instruments.

la date de réponse	2025
langue originale	Anglais
L'institution diplômante	Universite de Namur