Nexus Between Inflation Public Debt and Economic Growth In Ethiopia

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Ethiopian Economy prior to 2002/03 exhibited moderate and stable inflation, However, a continuing rise in prices and strong economic expansion have been observed since 2002/3.Based on this circumstance and growing stock of public debt, this study examined causal relationships between inflation and public debt, public debt and growth, and between inflation and economic growth in Ethiopia. The estimation has been carried out by using Autoregressive Distributed Lag (ARDL) and Error Correction Method (ECM) using time series data set spanning from 1981 to 2021. To show the directional relationship between variables, the Granger causality test was used. The results indicated the existence of a long run relationship among the variables. Inflation level from 3.5 to 20 percent is important for long run real GDP growth. In the short-run, a rise in price discourages economic growth in Ethiopia. There is a short run causality running from inflation to real Gross Domestic Product; and in the long run economic growth and inflation move together. Trade openness has both long and short run negative impact on real GDP. Domestic public debt inversely affects real GDP growth in short term; in the long run external public debt has negative impact on Real GDP growth. The short run, long run and ECM estimates all agree over significance and causation: inflation and external public debt estimates have inverse and significant relationship, while inflation and real GDP have positive and significant long run relationship. The speed, at which real GDP returns to equilibrium after changes in inflation, public debt and other control variable, as measured by ECM, is 0.23 percent, indicating the strength of the economy’s ability to accommodate shocks. The casualty results indicate that, there is a long-term unidirectional causal relationship between inflation and real GDP growth as well as a unidirectional relationship between domestic public debts to inflation. Inflation and domestic public debt were found to have a long-term one-way causal relationship with economic growth. Based on the study's findings, policies should be designed to ensure price level with in threshold level (3.5-20) percent. Additionally, policymakers should work together to improve output in order to lower prices for goods and services and promote economic growth with managed public debt.



Public Debt, Economic Growth, Ethiopia