DYNAMICS OF INFLATION AND ITS IMPLICATION ECONOMIC GROWTH IN EAST AFRICA: CASE STUDY FROM SUDAN, KENYA, AND ETHIOPIA

Abstract

The inconclusiveness of many empirical studies on inflation and economic growth relationship whether a positive or perhaps negative is always pressurize the Policymakers to develop relevant guidelines to understand these two macroeconomic economic indicators. Many researchers investigated the relationship between inflation and economic growth in Ethiopia, Kenya, and Sudan using different tools and approaches. This study will contribute to the lack of literature by analyzing and comparing the dynamics of Inflation and its Implications on economic growth in Ethiopia, Kenya, and Sudan. this study will contribute to how these countries can learn from each other to improve policies related to Inflation and Economic Growth. Secondary time-series data for the period 1991-2017 were collected on variables such as real GDP, inflation, FDI, Exchange rate, Population growth, and real per capita GDP, from African Development Bank and other official data sources. The study used the Autoregressive Distributed Lag (ARDL) bounds testing procedure to examine the presence of co-integration and long-run relationship among the variables. The Error Correction Model to investigate the short-run dynamics was used. All variables attained stationary after level I (0) or the first difference of I (1). The bounds tests found that the variables of interest are bound together in the long-run when taken as a dependent variable. The estimated F-statistics was above the upper Kripfganz and Schneider (2018) critical values at five percent significant level for all variables confirming the occurrence of a long-run relationship among all the. Empirical results further showed that in Ethiopia, Kenya and Sudan there was a significant long-run equilibrium real GDP has a Statistically, significant long-run relationship with the inflation. The coefficient of ECt-1 was negative and statistically significant. The stability of the coefficients was confirmed using the cumulative sum of residuals (CUSUM) that showed that the coefficients were stable at a 5 percent level of significance. Governments Officials and policymakers need to priorities to sound Macroeconomic policies to address the interactions between growth and inflation. Policies on the introduction of new technologies, building capacities in both public and private sectors, youth and gender parity, mobilizing domestic resources, and public participation are recommended for the Governments of Ethiopia, Kenya, and Sudan.