Abstract
An increase in inflation volatility implies higher uncertainty about future prices. As a result, producers and consumers can be affected by the increased inflation volatility, because it increases the uncertainty and the risk in the market. Thus, inflation volatility attracts the attention of researchers to find a suitable model which can predict the future conditions of the market. This study aims to fit appropriate ARMA-GARCH family models for food and non-food inflation rate of from the period January 1971 through June 2020. Since the main objective of the study is identifying an appropriate model for inflation series, the null and alternative hypotheses are defined in comparison of the two types of models. H0: The symmetric GARCH models better capture inflation volatility of Ethiopia. H1: The asymmetric GARCH models better capture inflation volatility of Ethiopia. The ARMA-GARCH family models were applied to capture the stylized facts of financial time series such us leptokurtic, volatility clustering and leverage effects. The mean model results show that, an ARMA (1, 2) and ARIMA (0, 1, 1) models are identified as the best fitted model for food and non-food inflation, respectively. From the estimation results of volatility model, an asymmetric TGARCH (1, 1) model with Student's t- distributional assumptions of the residual is the best model for non-food inflation. Thus, modeling of information, news of events is very significant determinants of volatility and GARCH family models are appropriate for the given series (monthly food-inflation volatility) of Ethiopia under the study period considered.
Highlights
Ethiopia inflationary experience was moderate and not considered as serious as the issue of economic growth
Results of Descriptive Statistics The data used in this study were monthly food and non-food inflation rate of Ethiopia from the period January 1971 through June 2020
Inflation volatility attracts the attention of researchers to find a suitable model, which can predict the future conditions of the market
Summary
Ethiopia inflationary experience was moderate and not considered as serious as the issue of economic growth. Since 2004, the country has experienced high and persistent inflation growth. Several macro-economic stabilization measures and policies were implemented over the past and seemed to be a complete failure. The booming economy has yet remained principally constrained by dual macroeconomic problems, i. E. price inflation and low international reserves [1]. A rising inflation has become one of the major economic challenges facing. The aforementioned creates a need of high wages in the economy and the companies increase the prices of goods and services to overcome the wage increase and at the same time to continue making profits in offering their services [2]
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