The Relationship between Inflation and Economic Growth: Evidence of Ethiopia from the Period 1991/92-2018/1
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Date
2020-06
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A.A.U
Abstract
The relationship between economic growth and inflation has attracted the attention of many researchers, Economists and policy makers all over the world. The main target of macroeconomic policies is to achieve a high economic growth rate with a low inflation rate; it is also believed that a high inflation has an adverse effect on economic growth. On the other hand, previous studies on the relationship between inflation and economic growth have revealed the complexity of this subject. Those studies come with different conclusions and policy recommendation there might be no relationship, a positive relationship or a negative relationship between inflation and economic growth. Other studies further show that these macro-economic variables might be related either in the short-run or the long-run or both, with no consensus on the direction of causality. Therefore, the ambiguity of the relationship between inflation and economic growth as represented in both theory and empirical studies warrants an investigation into this matter in the context of Ethiopia. The main aim of this study is to decide the cointegration between inflation and economic growth in Ethiopia. In doing so, the study seeks to unravel the short-run and long-run dynamics between inflation and economic growth as well as establishing the nature of causality between these economic variables. The study employs both descriptive and econometric analysis between economic growth and inflation relationship using annual data from 1991/92-2018/19 of different economic variables by applying Autoregressive distributive lag (ARDL) model as all variables are the combination of I(0) and I(1). The result of the study reveals that, the coefficient parameter of inflation is statistically insignificant since its p- value is greater than 5%. Moreover, the study concludes that there is no significant relationship between inflation and economic growth in the long run. In the short run the result suggests that, for the selected autoregressive distributive lag model, there is no relationship between inflation and economic growth. Generally both in long run and short run the study finds no co integration between inflation and economic growth. The paper discusses the important policy implications of the results. One important policy implication of the study is that, by knowing the past values of Economic growth, it is difficult to predict what inflation rate will be in the future
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Keywords
Autoregressive distributive lag (ARDL), Cointegratio, Economic Growth