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Nexus between inflation, income inequality, and economic growth in Ethiopia

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  • Abdurhman Kedir Ali
  • Dagmawe Menelek Asfaw

Abstract

The relationship between inflation, income inequality, and economic growth is a subject of intense debate among economic researchers and policymakers. This study aims to analyze this relationship in Ethiopia using advanced statistical techniques such as VEC (vector error correction) model with Granger causality, and Johansen’s cointegrated. The study covers the period from 1980 to 2022 and includes pre and post-estimation diagnosis tests to ensure the accuracy of the model. The results indicate the presence of a long-run relationship among inflation, income inequality, and economic growth, as confirmed by Johansen’s cointegrated test. Additionally, the vector error correction model shows a strong long-run relationship between economic growth, income inequality, and inflation. In the short run, there is a significant association between income inequality and economic growth, as well as between inflation and economic growth. The Granger causality test reveals a bidirectional causality between economic growth and income inequality and between economic growth and inflation. However, there is a unidirectional causality from inflation to income inequality. Based on these findings, it is suggested that the government should implement various strategies and policies, including redistribution policies, social safety nets, promoting inclusive economic growth, coordinating effective monetary and fiscal policies, implementing progressive taxation, and reforming the labor market.

Suggested Citation

  • Abdurhman Kedir Ali & Dagmawe Menelek Asfaw, 2023. "Nexus between inflation, income inequality, and economic growth in Ethiopia," PLOS ONE, Public Library of Science, vol. 18(11), pages 1-20, November.
    • Handle: RePEc:plo:pone00:0294454
    DOI: 10.1371/journal.pone.0294454
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    1. Vajrapatkul, Adirek & Vajrapatkul, Pinmanee, 2025. "Effects of Fiscal Policy in a Closed Economy: A Dynamic AD-AS Framework Analysis," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 32(1), January.

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