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The Relationship between Inflation and Economic Growth in East African Community Countries

Author

Listed:
  • Nyongesa Destaings Nyenyi

    (Department of Economics, Maseno University)

  • Eunice Lubega Amlega

    (Department of Economics, Maseno University)

  • Odhiambo Scholastica

    (Department of Economics, Maseno University)

Abstract

The relationship between inflation and economic growth has been of great concern to most countries and regions across the world. Several studies have attempted to explain the linear association, long run and causal relationship between inflation and economic growth however their findings have been somewhat inconsistent. For East African Community (EAC) countries, studies on the linear association, long run and causal relationship between inflation and economic growth have also been done although mainly dwelling on time series analysis. Coincidentally, their results have also shown inconsistent findings. The community being a trading block and in pursuit of regional integration, available studies have failed to explain the exact relationship that exist between inflation and economic growth in the region. In this regard, the study sought to establish the exact relationship that exists between inflation and economic growth in the community for the period (1990-2014) using panel time series approach. Â The study objectives were to determine the linear association between inflation and economic growth, establish the long run relationship between inflation and economic growth and determine the causal relationship between inflation and economic growth in EAC countries. The study presented panel data for 5 countries in the community and applied Robust Least Square estimation technique with fixed effects. The study was anchored on Solow growth model and employed correlation research design. Structural breaks at entry point to the community were accounted for by introducing a dummy variable in the model. Stationarity test was carried out on variables and found that GDP and inflation were stationary at level. Estimation results showed that inflation had a negative (-0.1341) and significant effect on economic growth at 5% significance level and the effect remained negative (-0.1129) but statistically insignificant after introducing a dummy variable to the model. Considering the objectives of the study, Correlation analysis showed that there exist a weak negative (-0.0067) linear association between inflation and economic growth in EAC countries. Co-integration results revealed that there exist a long run relationship between inflation and economic growth in EAC countries while result for causality analysis showed that there exists a uni-directional causal relationship from economic growth to inflation at 5% level of significance although the effect would be effective after 2 years. In conclusion, inflation negatively and significantly affect economic growth however, considering the structural breaks in EAC, the negative effect inflation reduces and becomes statistically insignificant to economic growth. That is, the time of entry to EAC has positive effect and thus reduce the negative effect inflation has on economic growth. Â In this regard, policies need to be put in place to keep inflation rate moderate and stable to ensure that the negative effect inflation has on economic growth is minimized in these countries.

Suggested Citation

  • Nyongesa Destaings Nyenyi & Eunice Lubega Amlega & Odhiambo Scholastica, 2017. "The Relationship between Inflation and Economic Growth in East African Community Countries," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(12), pages 152-162, December.
  • Handle: RePEc:nap:nijefr:2017:p:152-162
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    References listed on IDEAS

    as
    1. Manoel Bittencourt, Renee van Eyden and Monaheng Seleteng, 2014. "Inflation and Economic Growth: Evidence from the Southern African Development Countries," Working Papers 405, Economic Research Southern Africa.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. Satya Paul & Colm Kearney & Kabir Chowdhury, 1997. "Inflation and economic growth: a multi-country empirical analysis," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1387-1401.
    4. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    5. Christophe Hurlin, 2004. "Testing Granger causality in Heterogeneous panel data models with fixed coefficients," Post-Print halshs-00257395, HAL.
    6. Guiseppe Bertola & Ricardo J. Caballero, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 223-246.
    7. repec:dau:papers:123456789/6159 is not listed on IDEAS
    8. Raphael A Espinoza & Ananthakrishnan Prasad & Gene L. Leon, 2010. "Estimating The Inflation–Growth Nexus—A Smooth Transition Model," IMF Working Papers 10/76, International Monetary Fund.
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