Abstract
One of the prime objectives of governments is achieving stable macroeconomic condition. This objective requires that prices be kept to a reasonably stable level. High and persistent inflation introduces uncertainties into the economy and may lead to slowdown of economic growth by discouraging domestic as well as foreign investments. It may also cause balance of payments problems by eroding a country’s competitive advantage. Moreover, because it hits the poor the most it needs to be tackled. This study aims at understanding the forces behind the current inflationary process in Ethiopia. In order to achieve the stated objective a synthesis model of monetarist and cost-push inflation theories is estimated using vector autoregressive (VAR) and single equation error correction models. The estimated models enable to understand the short run and the long run inflation dynamics in Ethiopia between 1980 and 2017.The result shows that in the long run real money supply. Real GDP growth real effective exchange rate and Budget deficit have significantly affect inflation. But budget deficit and real GDP is not found the expected sign rather. The short run the change in real GDP growth and change real money supply significantly affect inflation. However the change real effective exchange rate and budget deficit are insignificant. The study suggests that adopting restrictive monetary and fiscal policy. Have essential tools to curb inflationary problem of Ethiopia. Keywords: inflation, ECM,GDP,VAR DOI: 10.7176/JESD/11-11-01 Publication date: June 30th 2020
Highlights
CHAPTER ONE 1.1 Introduction It is widely believed that moderate and stable rate of inflation promotes output growth, ensure return to saver enhance investment and accelerate economic growth
Price stability is an indicator of macroeconomic stability people dislike price hikes because higher inflation rate reduce the purchasing power of their money making them unable to buy, the same quantity and quality of goods and service as before, given their income. (Kibrom, 2008)
Developing countries are characterized by low level of macroeconomic performance of high population lower per capital income or low real GDP growth, underemployment, high rate of series inflation, high debt burden, unfavorable term of trade, exchange rate depreciation and market instability, (OS.Sherivastiva, 2002), with regard to developing countries again the structuralist further identified the commonly observed basic structural bottlenecks, foreign trade bottlenecks, structural deficiencies in tax system and the budget constraints, constraints in supply of social overhead capital and skilled labor
Summary
CHAPTER ONE 1.1 Introduction It is widely believed that moderate and stable rate of inflation promotes output growth, ensure return to saver enhance investment and accelerate economic growth. Developing countries are characterized by low level of macroeconomic performance of high population lower per capital income or low real GDP growth, underemployment, high rate of series inflation, high debt burden, unfavorable term of trade, exchange rate depreciation and market instability, (OS.Sherivastiva, 2002), with regard to developing countries again the structuralist further identified the commonly observed basic structural bottlenecks, foreign trade bottlenecks, structural deficiencies in tax system and the budget constraints, constraints in supply of social overhead capital and skilled labor. Ethiopia as one of the developing countries has faced series macroeconomic problems such as a low GDP Growth rate, budget deficit, detoriated balance of payment and huge debt service since 1970`s the country has faced services macro-economic shocks such as ditorated investment market, devastating drought and wars. The average annual inflation rate for this period was 9.8%
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