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Modeling Inflation Volatility and Its Effect on Economic Growth in Ethiopia

Inflation volatility is a serious problem in the conduct of monetary policy. This is because it makes economic planning difficult, affects investment decision and hence growth. This study aimed at modeling inflation volatility and analyzing itseffect on economic growth in Ethiopia. The study uses quarterly data on Consumer Price Index (CPI) and Gross Domestic Product (GDP) for the period 1991/92-2010/11.To model inflation volatility as time varying process an extended form of GARCH (Generalized utoregressive Conditional Heterosedasticity) model i.e. Threshold GARCH is used. The study finds strong evidence for the existence of Freidman-Ball hypothesis. TGARCH model is used to allow for asymmetric effect of positive and negative inflationary shocks and the result indicates strong asymmetric effect of inflationary shocks on inflation uncertainty. Cointegrated VAR (Vector Autoregressive) model and granger causality test are also used to see the relationship between inflation, inflation uncertainty and growth. From the cointegrated VAR model the growth rate of GDP affects inflation positively in the long run and negatively in the short run. The granger causality result indicates that inflation granger causes inflation uncertainty positively and inflation uncertainty granger causes output growth negatively. To prevent the negative consequences of inflation including uncertainty problem, finding a growth rate that is consistent with stable inflation rate is sounder rather than always focusing to beat inflation first and the National Bank of Ethiopia (NBE) should restore public confidence via credible policy instruments. Furthermore determining the threshold level of inflation-growth relationship is important to know the type of relationship that exists between growth and inflation.
Ethiopian Economics Association (EEA)
Primary Descriptors: 

Economic Development

Secondary Descriptor: 

Ethiopia - Economic Policy

Geographic Descriptors: 
Cataloge Date: 
Broad Subject heading: 
Inflation (Finance) - Ethiopia
Call Number: 
330.963 PRO 2015
Serial Key Title: 
Proceedings of the Twelfth International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Publication date: 
2015-06-01 00:00:00
Conference Place: 
EEA Conference Center
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Current frequency: 
Conference date: 
July 16 to 19, 2014