ASSESSING THE IMPACT OF INFLATION ON THE ECONOMIC GROWTH OF ETHIOPIA

Abstract

One of the prime objectives of macroeconomic policy both in developed and developing countries are to achieve economic stability and obtain sustainable economic growth simultaneously with price stability. This study, therefore, seeks to assess the impact of inflation on economic growth using annual time-series data for the period 2000/01 – 2016/17, which is conducive for economic growth in Ethiopia. Based on the data found from NBE and MoF, it is found some evidence that inflation has impact on economic growth. Estimated threshold model indicate that there is non-linear relationship between economic growth and inflation in the Ethiopian economy. This study shows the level of inflation is must keep below the threshold level because the inflation below some level of inflation brings positive impact to the economic growth but after this level it seriously hurts the growth of the economy of Ethiopia and as a result high inflation retards growth by reducing investment and bringing inefficiency to the system. Thus, excessive inflation has a growth inhibiting effect. As an inflation targeting country, this is a crucial finding as it provides a baseline study in search of the optimal level of inflation for sustainable economic growth. These findings are essential for monetary policy formulation by the National Bank of Ethiopia, whose primary objective is the achievement and maintenance of price stability, as it provides a guide for the bank to work on minimizing inflation rate consistent with long-term sustainable economic growth goals of the country.