The Inflation Dynamics across Regimes and Its Effect on Poverty in Ethiopia: VAR and ARDL Approach

Abstract

The purpose of this paper 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 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 significantly in the long run. 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.