Inflation and Economic Growth: An Estimating of Threshold Level of Inflation in Ethiopia
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Date
2014-06
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Addis Ababa University
Abstract
One of the prime objectives of macroeconomic policy both in developed and developing countries are to achieve economic stability and obtain sustainable economic growth simultaneously with price stability. This study, therefore, seeks to estimate the optimal level of inflation using quarterly time-series data for the period 1991 – 2013, which is conducive for economic growth in Ethiopia by following the Khan and Senhadji (2001) methodology. Based on the approach adopted, it is found some evidence that inflation has a threshold effect on economic growth. Estimated threshold model indicate that there is non-linear relationship between economic growth and inflation in the Ethiopian economy and the threshold level of inflation for GDP growth is 10 percent. As an inflation targeting country, this is a crucial finding as it provides a baseline study in search of the optimal level of inflation for growth. These findings are essential for monetary policy formulation by the National Bank of Ethiopia, whose primary objective is the achievement and maintenance of price stability, as it provides a guide for the Bank to choose an optimal inflation rate, which is consistent with long-term sustainable economic growth goals of the country
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Sustainable Economic Growth