Modeling Current General Price Inflation And Its Co-Integration With Macroeconomic Factors In Ethiopia
Approving stable price inflation and sustainable growth is the key objective of the government. The existence of unstable price inflation and imbalance of macro-economy is the existing fact in Ethiopia. Thus, in this study, the major objective such as “Modeling Current General Price Inflation and its Co-Integration with Macroeconomic Factors in Ethiopia” was addressed using the most efficient econometric methodology, vector error correction model (VECM) for the time series data which spans from 1996 to 2021. It was conducted in order to model both short term and long-run relationships among price inflation and other macroeconomic series such as; broad money supply, interest rate, exchange rate and real GDP. Among major findings of this study, there was long run relationship or disequilibrium between broad money supply and price inflation which were positive and significant. It was also seen that the rate of adjustment per month for broad money supply was seen as 24% and 12% for price inflation respectively. This study has also affirmed the existence of disequilibrium (long run relationship) between price inflation and exchange rate based on the result of VECM analysis. Particularly, the value of standardized eigenvector which was -0.23 has shown that, as the exchange rate (Birr/$USD) increases by a unit, it results in the increase of the price inflation by 23% assuming other macroeconomic factors remaining constant. The rate of adjustment to equilibrium per month of exchange rate was seen as 19% per month. Moreover, there were also disequilibrium between price inflation rate and real gross domestic product (RGDP) in Ethiopia. The rate at which RGDP adjusts to the disequilibrium was 15% per month for the study time. Thus, government should play great role on minimizing the adverse effect of foreign currency on high and instable price inflation in Ethiopia. Additionally, the monitory market should be well managed through effective monetary policy.
Co integration; price inflation, economics
Cite this paper
Dereje Demeke Danoro. (2022) Modeling Current General Price Inflation And Its Co-Integration With Macroeconomic Factors In Ethiopia. International Journal of Economics and Management Systems, 7, 235-248
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