There have been a few attempts to study the determinants of inflation in Ethiopia. The studies came up with various conclusions. Demirew (1998) used the Aghevliof fiscal dominance and absence of any firm commitment to particular levels of variables. and Khan (1978) type model to study the relationship between budget deficit, money supply and inflation in Ethiopia using data from 1965 -1997. The study applied 2SLS technique of estimation in estimating the coefficients of the model.
The study found persistent budget deficit explains Ethiopian inflation during the period via its effect on money supply growth. Semu (1994) identifies real GDP, expected inflation, and budget deficits as the factors behind Ethiopian inflation. He found that monetary variables were not significant determinants of inflation refuting the monetarist thesis. Muche (2007) used structural vector autoregressive model (SVAR) with two variables-real output and CPI. He tried to study the effect of demand and supply shocks on real output so as to determine the current inflationary in Ethiopia is an outcome of demand and/or supply shocks. He found that in recent periods inflation is mainly driven by demand factors.
Yohanis (2007) estimated a general equilibrium macroeconometric model to study the sources of the current inflation in Ethiopia. He found that inflation in Ethiopia is explained by a combination of factors including real GDP, money supply, consumer price indices of major trading partners and exchange rate. He also emphasizes the role of “rural transformation” reflected in terms of improved access to information and credit has played a role in Ethiopian inflation.