DETERMINANTS OF INFLATION IN ETHIOPIA FROM 1980 to 2019

This study examines the determinants of inflation in Ethiopia, using Vector Error Correction Model (VECM) by using annual time series data from 1980 to 2019. Augmented Dickey-Fuller unit root test indicated that the variables are integrated of order one. However, the variables transformed to stationary by taking the first difference. The Johansen co-integration test revealed that the existence of long-run relationship between variables. Furthermore, the coefficients of VECM indicates that there is a positive and significant relationship between inflation, budget deficit and national debt. However, the effect of money supply on inflation is only on the short run. Finally, the model is stable if a shock happens in the future