Browsing by Author "Kiros Seyoum Abreham"

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    The Effect of Exchange Rate, Interest Rate, & Inflation on Economic Growth: Evidence from the Ethiopian Economy
    (A.A.U., 2023-07-05) Kiros Seyoum Abreham; Helen Berga (Ph.D)
    The research investigated the effect of exchange rate, lending interest rate, and inflation on the economic growth of Ethiopia, using data from 1982 to 2021. The independent variables included exchange rate, lending interest rate, inflation rate, government expenditure, gross capital formation, and foreign direct investment, with economic growth functioning as the dependent variable. Integration levels in the time series were determined through the Philips-Perron (PP) and Augmented Dickey-Fuller (ADF) unit root tests. The Auto regressive Distributed Lag (ARDL) and its Error Correction Model (ECM) were applied to discern long run and short-run relationships. The study identified both long run and short-run relationships within the assessed model. It revealed that over time, the exchange rate has a considerably positive influence on economic growth. In contrast, to initial years in the short run, the exchange rate exhibits a negative and significant effect at both lag 1 and lag 2. Regarding inflation, its effect on economic growth is not significant in the long run. However, in the short run, it has a significant and negative effect, particularly with a one-period time delay (lag1). Lastly, lending interest rates have a negative and significant effect on economic growth in both the short and long run. In addition, the research investigated whether there is a statistically significant threshold level of inflation that influences growth in Ethiopia differently, based on whether it falls below or above this level. The study used time series data from 1982 to 2021 and the Ordinary Least Squares (OLS) technique to analyze this. The findings confirmed a maximum threshold of 7 percent for a positive relationship between the two variables. However, when inflation rates exceed 7 percent, the relationship turns negative. The research findings indicate that for promoting economic growth in Ethiopia, it is essential for the Ministry of Finance (MOF) and National Bank of Ethiopia (NBE) the to adopt policy suggestions such as ensuring a stable exchange rate, controlling lending interest rates, and targeting inflation rates below 7%. It is advised that monetary and fiscal policy creators pay attention to the insights offered, which would assist them in formulating efficient strategies to manage these microeconomic indicators effectively, ultimately contributing to the country's economic growth. By adopting a coordinated strategy that integrates these policies, Ethiopia can attain sustainable growth. To ensure the effectiveness of these measures, continual evaluation and adjustments are essential.