Empirical Analysis of Relationship Between Inflation and the Rate of Interest on GDP in Ethiopia

Abstract

This study has examined the influence of real rates of interest and inflation on the economic development of Ethiopia. The study used analysis of time series data and chose to collect samples of 42 years, covering the period from 1981 to 2022. The research used data gathered from the World Bank's archive as well as the International Monetary Fund’s (IMF) Global Economic Outlook database. In addition, the research used an econometric analysis methodology by using the auto-regressive distributed lag (ARDL) model and its related Error Correction (ECM) Model to determine the long-run and short-run correlations between the variables. The study used the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests to determine the stationarity or non-stationarity of the time series data variables in the research, as well as their integration levels. The research used economic growth (GDP) as the dependent variable. The E-Views 12th edition software package facilitated the use of various time series data analysis methodologies and tests. The research has identified both short and long-term cointegration links among all the variables examined in this study. The findings revealed a statistically significant inverse correlation amongst real rates of interest and Ethiopia's growth in economy over time, seen in both the long term and the short term. In the long term, inflation has a clear and substantial impact on Ethiopia's economic development.