Effect of Inflation on Economic Growth of Ethiopia

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.