IJSRP, Volume 6, Issue 1, January 2016 Edition [ISSN 2250-3153]
Fitsum Sharew Denbel, Yilkal Wassie Ayen and Teshome Adugna Regasa
The Ethiopian Economy has the feature of low and stable inflation before the period 2002/03. However, in the post 2002/03 period continues rise in the prices level along with rapid economic growth has been emerged. On the basis of this situation, this study has examined the existing causal relationship between inflation and money supply and between inflation and economic growth in Ethiopia for the period 1970/71-2010/11.The Johansen co integration test indicates the presence of one co integrating vector and the VECM demonstrate that the existence of long run bi-directional causality between inflation and money supply and uni-directional causality from economic growth to inflation. In the short run one way causality were found from money supply and economic growth to inflation. Therefore, the key findings of the study are inflation is a monetary phenomenon in Ethiopia and inflation is negatively and significantly affected by economic growth.Thus, based on the results of the study, monetary policy should be planned to maintain price stability by controlling the growth of money supply in the economy. Also combined efforts should be made by policy maker to increase the supply of output so as to reduce the prices of goods and services and boost the growth of the economy.