Abstract:
Ethiopian economy is unstable and inflation plays a lion’s share for such instability. As per its
main objective, the study examined factors affecting inflation, and its effect on human
development index (HDI) in Ethiopia for the period 1991-2021 using ARDL Approach. The
data were obtained from national bank of Ethiopia. The study identified the direction of
dynamic causality between broad money supply growth and growth in inflation using TYDL
approach. The Philips Pearon unit root test employed showed that the series contain a mixture
of I(0) and I(1) variables and that no variables is found I(2) implying that ARDL model is
quite appropriate. And the coefficients diagnostics test results revealed that no evidence of
serial correlation, no functional form problem and the residual is normally distributed with
constant variance. Moreover, the Ramsey Reset test of parameter stability tests showed that the
estimated ARDL modes are stable and therefore the parameters are unchanged over the three
decades covered by the sample. The bound test (F-statistic) for ARDL in inflation found a long
run relationship (co-integration) among inflation growth and its explainers. Besides, the error
correction coefficient Inflation ARDL is estimated significantly at negative -0.351611. The
bound test for the second model founds that inflation does not impact the human development
of Ethiopia in the long run. Moreover, the first empirical model revealed that the growth in
world gold price and the growth Ethiopian broad money growth increase the growth of
inflation in Ethiopia in the long run. And in the short run, it founds that inflation in Ethiopia is
positively determined by growth in government expenditure, in real interest rate and in one
period lagged value broad money supply implying that historical money supply policies also
matter. Moreover, it can conclude that money supply in Ethiopia has been inflationary both in
the short run and in the long run. The findings of TYDL Granger Causality suggested that there
exist bi-directional causality running from money supply growth to inflation and from inflation
growth to money supply growth. And hence it can be concluded that money supply in Ethiopia
is always an inflationary. Therefore, the policy implications drawn give an homework for
national bank of Ethiopia and the Ethiopian government so that one may fight against high
inflation by following appropriate set of economic policies and strategies.
