Macroeconomic Determinants of Price
Dynamics in Ethiopia
Seid Nuru
seidnali@yahoo.com
EEA/EEPRI
ZEF, Bonn
January 31-February 1, 2013
Outline
•
•
•
•
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modelling Strategy
2
> Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Motivation
•
Inflation was not an issue in Ethiopia until 2005.
•
Inflation rates were mostly single digits except
periods of drought and climax of war.
•
Prices begun to soar in 2005.
3
>
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Motivation : Trends in Price Levels
Price Levels (July 1997-April 2011)
300,0
250,0
200,0
150,0
100,0
50,0
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
0,0
1997 1998
1999
2000
2001
2002
Food Index
2003
2004
General Index
2005
2006
2007
2008
2009
2010 2011
Non-food Index
4
>
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Motivation : Inflation
100
Food Index
80
General Index
Non-food Index
60
40
20
-20
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
0
1997 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011
-40
5
1997:July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
>
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Motivation : First Differences in Food Price
40
30
20
10
0
-10
-20
-30
6
>
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Motivation: The Debate
•
The National Bank of Ethiopia insists that
inflation in Ethiopia is by and large an imported
phenomenon.
•
Researchers in the area and other stakeholders
(including IMF) argue that it has more to do with
expantionary monetary and fiscal policies.
7
>
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Purpose of the Study
•
This is part of a bigger project which focuses on
the drivers and impacts of inflation in Ethiopia.
•
It attempts to identify the macroeconomic causes
of inflation in Ethiopia.
•
Today‘s talk is on work in progress on the theme.
8
Introduction
> Price Trends and Major Incidences
Macroeconomic Determinants of Price Dynamics in Ethiopia
Conceptual Framework
Modeling Strategy
Inflation and Time Line of Incidences
100
General
Food
Non-food
80
60
40
20
-20
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
March
July
November
0
1997 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-40
I
II
III
IV
V
VI
VII
9
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Service-Led Economy
60,0
50,0
Percent
40,0
30,0
20,0
10,0
0,0
Agriculture
Industry
Service
1991/921998/99
49,4
11,7
33,2
1999/002004/05
47,5
13,2
39,2
2005/062009/10
44,1
13,0
42,9
2008/9
2009/10
42,6
12,8
45,5
41,6
12,9
45,6
10
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
A Service-Led Growth
Agriculture
Crop
Industry
Manufacturing
Construction
Services
Wholesale and Retail Trade
Hotels and Restaurants
Transport and Communication
Financial Intermediation
Real Estate and Renting
Public Administration and defense
Education
Health
GDP
2000/01-2004/05
(SDPRP)
Weighted
Share in total
growth
growth
2.64
41.5
2.23
33.3
1.08
17.1
0.26
3.9
0.69
10.3
2.63
41.4
0.71
10.6
0.17
2.5
0.65
9.7
0.14
2
0.83
12.4
-0.11
-1.64
0.29
4.3
0.07
1.1
6.35
100
2005/06-2009/10
(PASDEP)
Weighted
Share in total
growth
growth
3.7
33.2
2.83
25.1
1.3
11.7
0.48
4.2
0.63
5.6
6.15
55.2
1.85
16.4
0.73
6.5
0.55
4.9
0.49
4.4
1.44
12.7
0.43
3.9
0.45
4
0.14
1.3
11.14
100
11
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Inflation a Monetary Phenomenon?
12
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Inflation a Monetary Phenomenon?
13
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Credit Expansion to Public Enterprises
200
per cent
150
100
50
0
-50
Public Enterprises
Private Sector
14
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Prices of Major Import Items
•
•
•
•
In 2008, import items whose prices increased
significantly had a share of 33 percent in the total
import bills.
In that year, unit price of imports for peteroleum
soared by 145 percent.
In the same year, the unit price of fertilizer
increased by 254 percent.
Prices of imports of food items including grain
increased by 55 percent.
15
Macroeconomic Determinants of Price Dynamics in Ethiopia
>
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Global Price Transmission Mechanism: A Three Country World
16
Macroeconomic Determinants of Price Dynamics in Ethiopia
>
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Sources of Inflation: The Demand and the Supply
•
•
•
Broadly speaking, inflation could be cost pushed
or demand pulled.
While supply- side shocks may cause temporary
prices hikes, stubborn inflation is normally caused
by demand side shocks.
The global nature of price rises and the role of
speculations and expectations in the price
dynamcis are dominating the current debate.
17
Macroeconomic Determinants of Price Dynamics in Ethiopia
>
Introduction
Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
The Static Equilibrium
Keynesian
Cross
M-F theory
Demand Side
Equilibrium in the
Good‘s market:
Y, C, I, G, T, S, R,
X, M (TB); r, e, (q)
IS Curve
BP Curve
Demand-Side
Equilibrium:
AD Curve
IS-LM-BP model
Theory of
Liquidity
Preference
Equilibrium in
the Money
Market:
LM Curve
Equilibrium in
the Static Model
Y, M/P; r
AD=AS
The
dynamics
AS curve
Profit
maximization
Utility
maximization
Labor
Demand
Labor
Supply
Labor
market
equilibrium
Y, P, Pe, L, w
Production
Function
Introduction
Price Trends and Major Incidences
Conceptual Framework
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Modeling Strategy
30
The Data Generating Process: The Food Price
-20
-10
0
10
20
ARMA(3,0,2), ARCH(1)
0
50
100
t
dfood
150
200
xb prediction, one-step
19
Introduction
Price Trends and Major Incidences
Conceptual Framework
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Modeling Strategy
400
The Data Generating Process: The Food Price
0
100
200
300
ARIMA(3,1,2), ARCH(1)
0
50
Food Index
100
t
150
200
y prediction, one-step
20
Macroeconomic Determinants of Price Dynamics in Ethiopia
Introduction
Price Trends and Major Incidences
Conceptual Framework
> Modeling Strategy
The Task Ahead
• Cointegration analysis
• Impulse –response
• Variance decomposition
• The data issue
21
.
Thank You!!
22
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode I
1.
2.
Ethio-Eritrean war broke out.
Drought occurred in the Northern part of the country.
23
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode II
1.
2.
Bumper harvest in 2000/2001.
Slow business in the urban areas following the EthioEritrean war
24
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode III
Severe drought occurred and forced about 14 million people to look for
food aid.
25
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode IV
1.
2.
3.
4.
5.
Government advised farmers not to sell their products to traders
until the price rises. Eventually, the government itself had
started to purchase agricultural surplus at a pre-set higher
prices.
The government preferred cash over food aid under the safetynet program which eventually monetizes the rural sector.
Election was held and the aftermath of the election caused
uncertainty to set in.
Major donors reduced direct budget support to the government
on the handling of post-election events; the government has got
good reason to increase money supply and run deficit to finance
projects.
In 2007, The cumulative effect starts to kick in.
26
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode V
1.
2.
3.
4.
5.
Narrow money expanded significantly.
Credit advances to the public enterprises increased
significantly
Energy price escalated
The global financial crisis erupted
Drought hit the Southern part of the country.
27
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode VI
Central Bank announced tight monetary policy
28
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Episode VII
1.
2.
3.
4.
5.
Devaluation of the Birr (20 percent), favourable
international price for coffee, remittances increased,
foreign reserve increased by 104.3 percent, but the
central bank preferred not to sterilize...
Government increased salary of the civil servants
Price cap
Rise in oil price
A new role of government: GTP launched
29
-10
30/06/2003
1/9/2003
20/10/2003
5/12/2003
23/1/2004
8/3/2004
23/4/2004
11/6/2004
26/7/204
8/9/2004
27/10/2004
10/12/2004
2/2/2005
21/3/2005
9/5/2005
29/6/2005
12/8/2005
30/9/2005
18/11/2005
30/12/2005
15/2/2006
31/3/2006
29/5/2006
12/2/2007
4/4/2007
25/5/207
11/7/2007
24/8/2007
17/10/2007
30/11/2007
15/1/2008
10/3/2008
7/5/2008
23/6/2008
8/8/2008
22/9/2008
7/11/2008
26/12/2008
20/3/2009
11/5/2009
26/6/2009
10/8/2009
25/9/2009
9/11/2009
28/12/2009
12/2/2010
31/3/2010
19/5/2010
5/7/2010
20/8/2010
8/10/2010
Introduction
Macroeconomic Determinants of Price Dynamics in Ethiopia
> Price Trends and Major Incidences
Conceptual Framework
Modeling Strategy
Room for Speculation
Rate of Price Volatility for Maize (30.06.03-29.10.10)
30
20
10
0
-20
-30
-40
-50
30