The Inflation Dynamics Across Regimes And Its The Inflation Dynamics Across Regimes And Its Effect On Poverty In Ethiopia The Inflation Dynamics Across Regimes And Its Effect On Poverty In Ethiopia

The purpose of this thesis was to examine the inflation dynamics across regimes and its effect on poverty in Ethiopia for the past 55 years (that is, from 1966 to 2021). The study employed secondary data that were obtained from various sources. Both descriptive and econometric were used for the analysis. The econometrics analysis involved all the relevant time series econometrics models. These included Autoregressive Distributed Lag (ARDL) model (to identify factors affecting inflation rate across time) and Vector Autoregressive (VAR) model to determine the effect of inflation on poverty. The variables were subjected to unit root test and they were all stationary at first difference I(1). Using the Augmented Engle-Granger (AEG) and Johansen test, the variables were found to be co-integrated at 10% and 5% level of significance. The result showed that a 1% increase in broad money supply, real GDP, government expenditure, external debt, gas oil price and corruption index will increase INF by 0.32%, 0.1%, 0.55%,0.12%, 0.27% and 0.29% respectively on average in the long run. Interest rate and budget deficit were found to be insignificant in the long run. The result of the short-run model revealed that broad money supply, real gross domestic product, interest rate, government expenditure, budget deficit, external debt, gas oil price and corruption index were found to be significant variables in explaining the variation of inflation in the short-run. The analysis of inflation trend across regimes indicated that in comparison, the highest inflation was registered in 2008 during the EPRDF regime. Unlike the others, during the Prosperity Party (PP) regime, inflation keeps increasing. The result also shows there is Pair-wise causality between inflation and poverty. That is, inflation rate Granger cause poverty and also poverty Granger cause inflation rate. Based on the findings of the study, it was recommended that tightening of monetary policy by the government is necessary for a reduction of the inflation rate and the Ethiopian government should strive to curtail poverty level by formulating and implementing poverty reduction programme like social security in the country