Effect of Trade Openness on Inflation in Ethiopia (An Auto Regressive Distributive Lag Approach)
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Date
2014-10
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Addis Ababa University
Abstract
This study empirically examine the effect of trade openness on inflation in Ethiopia using
annual time series data over the period 1970/1971-2010/2011 by applying auto
regressive distributed lag(ARDL) model for inflation. The control variables that are
included in the inflation equation are gross fixed capital formation, money supply, per
capita income and government consumption expenditure. The objective of this study is to
test the applicability of Romer hypothesis in Ethiopia.
In the contrary to Romer hypothesis the finding of the study indicates that the role of
trade openness on reducing inflation is insignificant both in the long run and short run.
The result of the study confirms that among the control variables included in the inflation
equation, gross fixed capital formation significantly reduce inflation. But money supply,
per capita income and government consumption expenditure have a positive and
significant effect both in the long run and short run. The most important policy
implication that comes out of this study is that the policy makers should focus on
measures other than external trade sector such as money supply and government
expenditure in devising policies to combat and reduce domestic inflation.
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Regressive Distributive Lag Approach