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Budget deficits, money and inflation:the case of Ethiopia

Author

Listed:
  • Yemane Wolde-Rufael

    (London Borough of Camden, England)

Abstract

The paper investigates the causal link among inflation, money and budget deficits in Ethiopia for the period 1964 to 2003 using the bounds test approach to cointegration due to Pesaran et al. (2001) and using a modified version of the Granger causality test due to Toda and Yamamoto (1995). To check the robustness of the bounds test, we also used two additional long run tests: the dynamic ordinary least squares (DOLS) due to Stock and Watson (1993) and the fully modified ordinary least squares (FMOLS) due to Phillips and Hansen (1990). The empirical evidence shows that there was a long run cointegrating relationship among the series with a unidirectional Granger causality running from money supply to inflation and from budget deficits to inflation. In contrast, fiscal policy does not seem to have any impact on the growth of money supply. The implication is that fiscal balance and the control of the money supply are essential policy tools for the long-run macroeconomic stability of Ethiopia.

Suggested Citation

  • Yemane Wolde-Rufael, 2008. "Budget deficits, money and inflation:the case of Ethiopia," Journal of Developing Areas, Tennessee State University, College of Business, vol. 42(1), pages 183-199, September.
    • Handle: RePEc:jda:journl:vol.42:year:2008:issue1:pp:183-199
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    Citations

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    Cited by:

    1. Saungweme, Talknice & Odhiambo, Nicholas M., 2022. "Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 75(1), pages 75-100.
    2. Saungweme, Talknice & Odhiambo, Nicholas M, 2021. "Does public debt granger-cause inflation? A multivariate analysis," Working Papers 28342, University of South Africa, Department of Economics.
    3. José Pablo Barquero Romero & Kerry Loaiza Marín, 2017. "Inflation and Public Debt," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(1), pages 39-94, January-J.
    4. Saungweme, Talknice & Odhiambo, Nicholas M., 2022. "Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 75(1), pages 75-100.
    5. Talknice Saungweme & Nicholas M. Odhiambo, "undated". "Does Public Debt Granger-Cause Inflation In Tanzania? A Multivariate Analysis," Working Papers AESRI06, African Economic and Social Research Institute (AESRI).
    6. Dr. Burhan Othman Hussein, 2018. "The Time Change of the Consumer Price Index Response to the Changes That Occur in the Supply of Money in the Iraqi Economy," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 7-10:4.
    7. Yaya Keho, 2016. "Budget deficits, money supply and price level in West Africa," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(5), pages 1-8, October.
    8. T. Saungweme & N.M. Odhiambo, 2021. "Does Public Debt Granger-Cause Inflation In Tanzania? A Multivariate Analysis," Working Papers AESRI-2021-25, African Economic and Social Research Institute (AESRI), revised Dec 2022.

    More about this item

    Keywords

    Ethiopia; budget deficits; money; inflation; bounds test; causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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