Inflation, exchange rate, and economic growth in Ethiopia: A time series analysis

Abstract

This study aims to investigate the dynamic relationship between inflation, exchange rate, and economic growth in Ethiopia for the period 1991–2020. This is because of rampant inflation, continuously devalued domestic currency, and the declining growth rate of the country due to violent conflicts. The study uses the ARDL model for short-run and long-run dynamics, the Bound test of co-integration to confirm if the target variables go together or not, and Granger causality tests are performed to detect dynamic effects. The ARDL model estimates suggested that inflation and exchange rate are negatively related to economic growth. This implies that an increase in the price level reduces the production of goods and services, while devaluation has a negative impact by reducing imports of intermediate goods. Thus, increasing domestic resource mobilization, improving regulatory quality, and deepening the financial sector can be viewed as solutions to decrease chronic foreign exchange shortages, lower inflation, and boost economic growth rates.