The Nexus Between Inflation, Private Investment And Economic Growth In Ethiopia: Ardl Approach

Abstract

The study aims at Nexus between Inflation, Private Investment and Economic Growth in Ethiopia. Know a day inflation rate is serious issue and needs attention especially by policy maker to reduce the rate of inflation because inflation affects economic growth. There has been considerable debate on the existence and nature of the inflation and growth relationship. The argument is that whether inflation is necessary for economic growth or it is detrimental to growth. The estimated models enable to understand the long run and short run relationship of the variables for the period 1980–2021 in Ethiopia. To figure out the long-run and short-run relation among the variables, an Autoregressive Distributed Lag (ARDL) bounds test approach to co-integration was employed to help in addressing the objectives. General inflation and growth of real GDP are stationary at level, I (0). While fixed growth capital formations are stationary at first difference. After the stationary test, the bound test for co-integration showed that real growth rate and its determinants considered are co-integrated. Hence, an error correction model (ECM) was then estimated. The model passed all the required diagnostic tests. The study has the following major findings: First, Real GDP exerts Positive and significant effect on private investment in the long run. Second, there is strong evidence that inflation exert positive impact on Real GDP. Third, there is evidence of bi-directional causality between inflation, private investment and real GDP. Fourth, the impulse response function indicates that the variables are at fast movement towards long run time path. The overall findings of the study underlined given the long run positive impact of RGDP on private investment, it will be natural to think of different reforms. Here, Inferences drawn will have implications for all stakeholders in the economy and are particularly useful for fiscal policy makers of the country