A Research Paper Submitted to the School of Graduate Studies, Department of Economics for the Partial Fulfilment of the Requirements for the Degree of Master of Science (MSc) in Development Economics.

Inflation remains the major macroeconomic issue throughout the world. Inflation and its effect on social welfare are a hot topic in developing countries, garnering significant attention from policymakers and researchers and attract considerable attention because the majority of households in developing countries are required to spend the lion's share of their income on these components. This study investigated the determinants of inflation and its effect on economic development on Ethiopia by taking a time series data from 1995 to 2021. To analyses the data the study, apply ARDL model. The study also adopted explanatory research design and quantitative approach. Further the study has two models, the first model of the study focuses identifying determinants of inflation and the second model focuses on determining effects of inflation on economic development together with other control variables. The result from the first model shows that broad money supply, real exchange rate, world price index and trade openness significantly affect inflation in Ethiopia. In the short run world oil price and population growth significantly affect inflation. Further, the long run co-integration from ARDL bound test shows that there was a long run relationship between research variables. The second model result which determines effects of inflation on economic development shows inflation and unemployment rate has a significant and negative effect on economic development, however, life expectance and institutional quality has a significant and positive effect on economic development in the long run. in the short foreign direct investment, trade openness and institutional quality also has a significant effect on economic development in the short run.