In addition, they also have found that devaluation of exchange rate is another important reason behind the inflation in developing countries especially in the short run. According to the monetarists, the major reason behind inflation in developing countries is the money creation by governments. Actually, there exists a controversy between monetarists and structuralists regarding the causes of inflation. There are different interpretations for the high inflation in developing countries. Introduction High inflation has been one of the important characteristics of the developing countries of Africa and Asia for the last many decades. The study may suggests avoiding continuous and high devaluation of the Birr to the extent possible to avoid the evil consequences of devaluation on the standard of living of the people.ġ. The result of variance decomposition shows that, at the initial period, the cause of variation in all the variables are from the variables themselves although the effect declines with time. The result of impulse response function shows that devaluation increases CPI in each period.

The result of Granger causality test shows that there is a unidirectional causality from nominal effective exchange rate and money supply to the CPI although there is bidirectional causality between CPI and WCPI. In the long run, the NEER, MS and WCPI have positive and significant effect on the CPI. The speed of adjustment from previous quarter’s disequilibrium in CPI to current quarter’s equilibrium is fast in each period. The result of ARDL in the short run shows that devaluation of the nominal effective exchange rate (NEER) has no significant effect on CPI although money supply and WCPI have a positive and significant effect. This paper examines the effect of devaluation on domestic price along with the effect of changes in Money Supply (MS), World Commodity Price Index (WCPI) and the Output gap on the Consumer Price Index (CPI) in Ethiopia for the period 1995 to 2017 on the basis of secondary data using bound testing (ARDL) approach of co-integration.

Dollar to birr black market 2018