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Analysis of Equilibrium Relationship among Government Budget Deficit, Money Supply and Inflation in Ethiopia: co-integrated VAR Analysis Approach

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  • Negash Haile Dedeho

Abstract

This study attempted to provide empirical evidences for causal long‐term relationship between budget deficit, broad money supply and inflation in Ethiopia. For this purpose, the study employed co-integrated VAR or vector error correction (VEC) model approach by using annual time series data over 1975-2012. The study also investigated direction of causality by using Granger causality test. Parameters of the system were estimated by using Johansen estimation approach. The results show that positive causal relationship between money supply and inflation both in the short and long run. It also shows that budget deficit affects both money supply and inflation in the long run. However, this is not conclusive by taking into account granger causality test. But both money supply and inflation do not Granger cause government budget deficit.

Suggested Citation

  • Negash Haile Dedeho, . "Analysis of Equilibrium Relationship among Government Budget Deficit, Money Supply and Inflation in Ethiopia: co-integrated VAR Analysis Approach," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 23(2).
    • Handle: RePEc:ags:eeaeje:259409
    DOI: 10.22004/ag.econ.259409
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    References listed on IDEAS

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    1. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521839198, January.
    2. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871, January.
    3. Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(4), pages 565-583, Winter.
    4. International Monetary Fund, 2004. "Euro Area Policies," IMF Staff Country Reports 2004/234, International Monetary Fund.
    5. LOENING, Josef & TAKADA, Hideki, 2008. "Inflationary Expectations In Ethiopia: Some Preliminary Results," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(2), pages 159-176.
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