Inflation Threshold and Economic Growth of Ethiopia
DOI:
https://doi.org/10.20372/sshr.v1i1.1545Keywords:
Economic Growth, Ethiopia, Factors, Inflation thresholdAbstract
This study examines the causality between inflation and economic growth in Ethiopia using threshold regression analysis on time series data from 1982 to 2020. The analysis identifies an inflation threshold of 16.46%, below which inflation has no significant impact on GDP. However, once inflation exceeds the threshold, GDP experiences a decline, indicating a negative relationship between the two variables. The model reveals the existence of two distinct regimes - one characterized by low inflation and high GDP, and the other characterized by high inflation and lower but still positive GDP. Various factors such as trade, foreign direct investment (FDI), unemployment, exchange rate, and government spending affect GDP differently depending on whether they operate below or above the inflation threshold. The findings of this study emphasize that inflation levels exceeding 16.46% hamper economic growth. Therefore, maintaining inflation lower or equal to 16.4.6% is crucial for fostering sound decision-making and instilling confidence. Therefore, creating a strong monitoring system to assess policy effectiveness, enabling timely adjustments, and addressing key economic indicators will foster sustained, inclusive growth; tackling challenges should be carefully done. Therefore, monetary policy ought to keep inflation below the estimated threshold in order to promote sustainable economic growth.
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