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International Journal of Advanced Research and Publications

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High Price Inflation And Its Co-Integration With Macroeconomic Factors In Ethiopia

Volume 5 - Issue 7, July 2022 Edition
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Author(s)
Dereje Demeke Danoro
Keywords
Co integration; Price inflation; VECM; Money Supply; Exchange Rate; Real GDP
Abstract
Achieving stable price inflation and sustainable economic growth are the key objectives pursued by 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 “Modelling Current General Price Inflation and its Co-Integration with Macroeconomic Factors in Ethiopia” was addressed using Vector Error Correction Model (VECM) for the monthly time series data which spans from 1996 to 2021. Vector error correction model was conducted in order to model both short term and long-run relationships among Price Inflation(PRI) and other macroeconomic series such as; Broad Money Supply(BMS), Interest Rate(IR), Exchange Rate (EXCHRT) and Real GDP. Among major findings of this study, the existence of long run relationship between broad money supply and price inflation which were positive and significant was confirmed. It was also seen that the rate of adjustment per month for broad money supply was at 43.902% and 10.73% 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 -0.2405 has shown that, as the exchange rate (Birr/$USD) increases by a unit, it leads to increase in price inflation by 24.05% assuming other macroeconomic factors remaining constant. The rate of adjustment to equilibrium per month of exchange rate was seen at 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 at 43% 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 significant monetary policy and other relevant macroeconomic measurements.
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