The purpose of the study is to examine the relationship between inflation and economic growth in Ethiopia over the period of 1991/92- 2014/15 by using data at quarter base. The study was employed Johansen method of co-integration and vector error correction model and a technique of conditional least square.
The result shows that both in long-run and short-run the relationship between inflation and economic growth is positive. Despite to this, the granger causality test tells us bi- directional causation between these two variables. The result also revealed that threshold level of inflation beyond on which inflation negatively affects economic growth of Ethiopia is 5 percent. Therefore, co-ordination between macro- economic policy makers is vital and should have to raise their hands and put their eyes on measures that keep down inflation below 5 percent to have sustainable economic growth in the country.
Table of Contents
1: INTRODUCTION
1.1. BACKGROUND OF THE STUDY
1.2. STATMENT OF THE PROBLEM
2: LITRATURE REVIEW
2.1. DEFINITION
2.2. THEORETICAL LITRETURE
2.3. EMPIRICAL LITRETURE
2.3.1. GLOBAL EMPIRICAL LITERATURE REVIEW
2.3.2. EMPRICAL LITERATURE REVIEW ON ETHIOPIA
3: METHODOLOGY
3.1. MODEL SPECIFICATION AND DESCRIPTION OF VARIABLES
3.2. SOURCE OF DATA
3.3. ESTIMATION METHOD
4: RESULTS AND DISCUSSION
4.1. DESCRIPTIVE ANALYSIS
4.2. ECONOMETRIC ANALYSIS
4.2.1. UNIT ROOT TEST AND CO-INTEGRATION ANALYSIS
4.2.2. VECTOR ERROR CORRECTION MODEL
4.2.3. MODEL STABILITY AND DIAGNONASTIC TESTS
4.2.4. GRANGER CAUSALITY TEST
4.2.5. ESTIMATION OF THRESHOLD INFLATION
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION
5.1. CONCLUSION
5.2. RECOMENDATION
Research Objectives and Themes
The primary purpose of this study is to empirically examine the relationship between inflation and economic growth in Ethiopia for the period 1991/92 to 2014/15 using quarterly time series data and a co-integrated Vector Error Correction Model (VECM) to identify the existence of a threshold level of inflation.
- Examination of the long-run and short-run dynamics between inflation and economic growth.
- Estimation of the specific threshold level of inflation for the Ethiopian economy.
- Analysis of the determinants of aggregate demand including money supply and interest rates.
- Application of Granger causality tests to determine the direction of influence between variables.
- Evaluation of the impact of government expenditure and exchange rate fluctuations on economic performance.
Excerpt from the Book
1.1. BACKGROUND OF THE STUDY
Now a day, developing countries like Ethiopia have a strong objective to achieve and maintain sustainable economic growth of the country. To realize and maintain continuous economic growth macro-economic stability is significant. Unemployment, business cycle, output growth and inflation are the major indicators of macro-economic stability. Macro-economic stability requires knowing and creating a smooth relationship between these variables in a country. Thus, one of the most relevant debatable issues in macro-economists is the relationship between inflation and economic growth. Policy makers and national banks commonly faced with difficulties to attain simultaneously price stability with sustained economic growth. Before we are going to see the relationship between these variables historically in detail, defining two terms is significant.
Economic growth can be defined as an increase in the productive capacity of a nation measured by percentage changes in gross national product (GNP) or gross domestic product (GDP) in some particular period of time. In other words, it is an increase in inflation adjusted market value of goods and services produced by an economy over a time usually measured a percent increase in real Gross domestic product (GDP) while inflation is a sustained decrease in purchasing power of currency over time or a sustained increases on average price of goods and services over time(Christianson, 2008).
There is no clear theory which states fixed relationship between inflation and growth. Controversy by quantity and institutional inflation theories also confirm this. According to quantity theorists, there is a long-run trade-off between inflation and economic growth but the supporters of institutional theory of inflation, are less sure about presence of negative relationship about inflation and growth. They agree that price level rises have the potential to generate inflation and that accelerating inflation undermine economic growth(Colander, 2004).
Summary of Chapters
1: INTRODUCTION: Outlines the background of the study and the core problem regarding the nexus between inflation and economic growth in the Ethiopian context.
2: LITRATURE REVIEW: Provides a comprehensive survey of theoretical perspectives and empirical findings regarding inflation and economic growth globally and within Ethiopia.
3: METHODOLOGY: Details the model specification, the data sources used, and the econometric estimation techniques, including the VECM and Conditional Least Squares.
4: RESULTS AND DISCUSSION: Presents the descriptive and econometric analysis, covering unit root tests, co-integration, model stability, and threshold inflation estimation.
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION: Summarizes the key findings of the research and offers policy recommendations for maintaining economic stability.
Keywords
Co-integration, Economic growth, Inflation, Threshold level of inflation, Vector error correction model, Ethiopia, Real GDP, Consumer Price Index, Macroeconomic stability, Granger causality, Aggregate demand, Time series analysis, Monetary policy, Structural break, Fiscal policy.
Frequently Asked Questions
What is the core focus of this research?
The research investigates the relationship between inflation and economic growth in Ethiopia, specifically seeking to identify if a threshold level of inflation exists beyond which economic growth is negatively affected.
Which economic variables are considered central to this analysis?
The study centers on real GDP as a proxy for growth and the Consumer Price Index (CPI) for inflation, while also accounting for broad money supply, government expenditure, average lending rates, and the real effective exchange rate.
What is the primary research goal?
The primary goal is to provide empirical evidence on the inflation-growth nexus to assist policymakers in maintaining a moderate level of inflation that supports sustainable economic development.
Which scientific methodology is employed?
The study utilizes a co-integrated Vector Error Correction Model (VECM) combined with the Johansen method and Conditional Least Squares (CLS) to estimate the inflation threshold.
What does the main body of the work cover?
The main body covers theoretical frameworks, empirical literature reviews, the development of the econometric model, and a detailed discussion of the results, including causality tests and diagnostic model checks.
What are the characterizing keywords of this study?
Key terms include inflation, economic growth, threshold level, co-integration, VECM, and macroeconomic stability in the context of Ethiopia.
What did the study conclude regarding the inflation threshold in Ethiopia?
The research concluded that 5 percent is the threshold level of inflation; exceeding this rate negatively impacts the economic growth of Ethiopia.
What is the nature of the relationship found between inflation and growth?
The study found a bi-directional positive causal relationship between inflation and economic growth within the observed range, but with negative effects once inflation exceeds the 5 percent threshold.
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- MSc Degree in Economics Deseke Kebede (Autor:in), 2017, The relationship of inflation and economic growth in Ethiopia, München, GRIN Verlag, https://www.grin.com/document/380888
