The Relationship Between Inflation and Value of Imports in Ethiopa: An Autoregressive Distributed Lag Approach

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Stable price is one of the main goals of any country and it’s considered by governments and policy makers and hence investigating the main cause of inflation is of great importance. Thus, this study aims to examine factors affecting inflation in Ethiopia with a focus on the role of import value of goods and services. An ARDL bound testing model was employed to investigate the relationship using a data covering the years 1981 to 2019. The results reveals that import value to GDP ratio and money growth increases inflation both in the short run and long run; lending interest has an increasing effect in short run but decreases inflation in the long run; official exchange rate, external debt to GDP ratio and growth rate of real GDP have a significant negative effect on general inflation in long run; Whereas external debt to GDP ratio has a negative and insignificant effect on general inflation in the short run. But, growth rate of real domestic product has a negative and significant effect on general inflation in short run. Finally, based on the estimation result, the researcher recommends the concerned body to reduce the severity of inflation in the country. The exchange rate policy should be implemented that will be favorable to reduce the cost of imported capital goods and the government should look inward for supplying of raw materials locally promotes investment in the area where the required raw materials are available locally.



Autoregressive Distributed, Relationship Between Inflation