Effect of Inflation on Economic Growth of Ethiopia

Tizita Gebeyehu Yismaw

doi:10.11648/j.jim.20190802.13

Abstract

The interaction between growth and inflation is one of the macroeconomic problems. Determining the effect of inflation on the economic growth of one country must be considered as a prior issue to build up a healthy economy. The main objective of this paper is to test that, whether inflation is an indicator or obstacle for economic growth of Ethiopia. Pair wise Granger causality test has been made to verify the objective of the paper and the pairwise Granger causality test result suggesting the existence of strong and significant correlation between variables pairwise. The test reveals a uni- directional causation between, real GDP and export (EX) and between real GDP and inflation and real GDP and investment. The causation runs from real GDP to inflation, real GDP to export and real GDP and investment respectively. In addition, taking the main objective which hypothesizes to proof whether inflation cause economic growth or the reverse holds true, the granger causality test pertains a uni- directional causation which runs from economic growth to inflation. Accordingly one can conclude that economic growth can cause for inflation but inflation doesn’t cause economic growth during the study period in Ethiopia (1975-2016). Based up on the finding it is evident that balancing economic growth target in line with a monetary policy target may have a vital role to boost economic growth and control the level of inflation.

Highlights

The most important approach that claims the existence of a positive relationship between inflation and the growth is the Phillips Curve approach
As far the Economic Growth of Ethiopian economy is concerned it continued to register remarkable growth, and the Real GDP expanded by10.3 % in 2013/14, which was beyond the GTP1 target of the country’s economic growth rate which was 11.2 % for 2013/14
The highest correlation happens between Export (EX) and investment (INT), with the magnitude of the correlation is (0.987) and Investment is correlated with Real GDP with a magnitude of (0.95)

Summary

Introduction

The most important approach that claims the existence of a positive relationship between inflation and the growth is the Phillips Curve approach. The empirical studies made afterwards showed that the relationship between inflation and the unemployment rate is valid in the short-term in case of unanticipated inflation According to another approach, rising inflation results in contraction of the individual’s wealth. Annual average national head line inflation at the End of fiscal year 2013/14 was 8.1 %, about 5.4 percentage points lower than the year 2012/2013. This was due to the slowdown in both food &nonalcoholic beverages and nonfood inflation by 6.7and 3.9 percentage points, respectively. As far the Economic Growth of Ethiopian economy is concerned it continued to register remarkable growth, and the Real GDP expanded by10.3 % in 2013/14, which was beyond the GTP1 target of the country’s economic growth rate which was 11.2 % for 2013/14. This economic growth has been impressive compared with the 5.4 % growth estimated for Sub-Saharan African countries in 2014 [4]

Objectives

Methods

Results

Conclusion