Inflation and Growth Relationships: a Comparative study of Ethiopia and Uganda
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Date
2014-06
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Addis Ababa University
Abstract
Understanding the world’s need for price stability, the possible growth halting effects that emanate from the rising levels of inflation in most African countries is becoming an issue of increasing concern. This study compares the impact of inflation on economic growth between Ethiopia and Uganda .In doing so it employs annual time series data of Consumer Price Index (CPI) as a proxy for inflation and Gross Domestic Product (GDP) at current price as a proxy for growth, which covers the period 1990-2012. The analysis adopted descriptive approach to show the trend and variability of inflation and growth so as to give a clear view how the variables change through time for both countries. The ADF and Phillp-Perron tests are conducted to check for stationarity in the variables, the Johansen co-integration test is used to confirm the existence of co-integration between inflation and growth variables. After finding the existence of co-integration between the variables the Vector Error Correction Model (VECM) is used to investigate the causal relationship between inflation and growth. Comparison of the coefficient of variations of the two countries shows that the variabilities of GDP and inflation are larger for Ethiopia than Uganda. And the Vector Error Correction Model shows the existence of a positive significant bi-directional feedback relationship between inflation and economic growth for Ethiopia both in the short and long run. But for Uganda there exists only a uni-directional negative relationship between inflation and growth that runs from GDP growth to inflation. Since there is a strong long run effect of economic growth on inflation both in Ethiopia and Uganda, there is a need for a stabilization program to mitigate the inflationary situations in both countries. Therefore, focus should be given on policies that will achieve price stability in Ethiopia. This demands further research in identifying factors affecting the level of inflation in the country and also on the impact of inflation on other economic variables like on the development of a country. Uganda needs to concentrate on the adoption of a more appropriate fiscal policy instruments like increasing the provision of infrastructural facilities, provision of professional training for farmers, increment of investment opportunities and the likes that could eliminate the structural bottlenecks.
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Inflation and Growth