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Impact Of Inflation And Unemployment On Economic Growth

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Received: 22 January 2023 / Revised: 20 March 2023 / Accepted: 23 March 2023 / Published: 25 April 2023

The main objective of this paper is to investigate the dynamic relationships between the three pillars of the economy: unemployment, inflation and GDP in Ethiopia using cross-wavelet transform (XWT) analysis, multivariate Student-t generalized autoregressive scores (GAS). model, and the Autoregressive Distributed Lag (ARDL) model. The dynamics between the three indicators were also examined using the Toda–Yamamoto (TY) causality test. Empirical findings of the XWT method suggest a relationship between unemployment, inflation and GDP, although this relationship varies with time and frequency. The estimation results of the multivariate Student-t GAS model show that the relationship between unemployment (overall, male, female and youth) and inflation is highly significant, indicating that the correlation is dynamic. A dynamic relationship exists between GDP and unemployment, except among women and youth. The findings of the ARDL approach revealed that unemployment had a significant negative impact on GDP. However, it was found that inflation significantly increased GDP. The general conclusion drawn from the findings of this study is that unemployment significantly affects GDP and inflation. Therefore, the government should aggressively implement policies to reduce unemployment, especially youth unemployment. Additionally, the administration should rehabilitate the country’s badly damaged economy and formalize a permanent cessation of hostilities between the federal government and the Tigray People’s Liberation Front (TPLF).

Pdf) Effects Of Inflation, Interest And Unemployment Rates On Economic Growth: Evidence From Asean Countries

Ethiopia is one of the most dynamic economies in sub-Saharan Africa (Dorosh and Mellor 2013), as well as the country with the largest population, water resource potential (Helu 2022), and the potential to generate hydropower with a capacity of 45,000 MW. watts (MW) (International Energy Agency 2019), and a total surface area of ​​more than 1.1 million square kilometers (Khatami et al. 2020). Ethiopia’s economic growth rate has been the subject of many studies. For example, the country has seen impressive growth and poverty reduction from 2010/11 to 2014/15, with GDP growth averaging 10.1% or about 8% per capita growth (Federal Democratic Republic of Ethiopia 2016). . Poverty has declined significantly, with a low Gini index of 30% by international and sub-Saharan African standards (Federal Democratic Republic of Ethiopia 2016). The country’s GDP has grown by double digits, the second fastest growth in Africa after Angola (Deloitte 2014; Rodrik 2018). The country’s growth miracle helped the Ethiopian government (i) gain the interest of various foreign firms (Deloitte 2014), and (ii) reduce rural poverty by increasing overall economic productivity (Rodrick 2018).

Despite consistent GDP growth, Ethiopia’s macroeconomic performance deteriorated due to severe drought and adverse global climate in 2015–2016. As a result, production grew slowly in 2015–2016 (Federal Democratic Republic of Ethiopia 2016). In addition to severe drought and a worsening global climate, high unemployment has become increasingly common in Ethiopian and African cities (Daniel 2011; Mokona et al. 2020). For example, youth unemployment increased by 60% between 1990 and 1994, and youth with secondary education experienced the highest unemployment rates (Krishnan 1996). Urban unemployment was 25% in 2015 and 25.3% in 2018, significantly higher among youth and primarily a social and health concern, despite modest gains in net employment prospects since 2003 (Mokona et al. 2020 ; Shiffraw 2017). Furthermore, Ethiopia had the highest monthly food inflation rate among developing countries between 2008 and 2011, at 3.5% per month, mainly due to rising food prices for maize, wheat and teff (Bachewe and Hady 2017). . Inflation pressures have increased recently, following a 15% devaluation of the Ethiopian currency (birr) in October 2017. In April 2018, the annual general price level increased by 13.7%, food prices increased by 16.1%, and non-food goods prices increased by 10.8% (Quarterly Economic Brief 2018).

The world has been facing an unprecedented situation due to the coronavirus disease (COVID-19) since the beginning of 2020. COVID-19 has been a massive health and economic disaster for the world (Hensher 2020; Shiffraw 2021). Ethiopia, Africa’s second most populous country and a country with a fast-growing economy before the pandemic, was hit hard by the pandemic, like many other African countries. Additionally, many countries witnessed unprecedented unemployment increases due to the pandemic (Hensher 2020). With 345 million full-time equivalent jobs lost globally in the third quarter of 2020 alone, unemployment was one of the world’s critical challenges (ILO 2020). The COVID-19 pandemic has affected employment in Ethiopia and many other countries, leaving many families unemployed.

On 5 November 2020, the Tigray People’s Liberation Front (TPLF) and the Ethiopian federal government engaged in armed conflict, but difficulties persisted. The TPLF was a major party in the Ethiopian People’s Revolutionary Democratic Front (EPRDF), a four-party coalition that dominated the country for nearly three decades (Meister et al. 2022). This conflict led to a civil war that devastated large parts of the country and killed countless people. Due to the civil war, the country had serious political, racial, and economic problems, which led to the loss of a large number of jobs and the highest inflation in the country’s history (Mtshanda 2022).

Historical Us Unemployment Rate By Year

For many reasons, understanding the relationship between unemployment, inflation and GDP is essential for a country that is still struggling to overcome poverty. For example, a successful transition to a manufacturing and service-oriented economy depends on a better understanding of urban labor market characteristics (Vera-Toscanoa et al. 2020). Key indicators that the public and policy makers pay special attention to and scrutinize include unemployment, inflation, and gross domestic product (Adams et al. 2021; DeBarre 2008). They serve as a scorecard of an economy and provide a sense of its general health (DeBayer 2008). This study is unique because it fills an important knowledge gap about the relationship between GDP changes, unemployment rates and inflation in Ethiopia, the world’s largest landlocked country and Africa’s second most populous country. According to the author, more research is needed to determine how Ethiopia’s GDP, unemployment and inflation are related. To bridge this gap, this study looks at the dynamic relationships between these metrics in Ethiopia. As another way of putting it, this study empirically investigates and answers the following question: How do the three indicators interact over time and frequency? Solving this problem will provide new insights into the three indicators and help Ethiopian policy makers in regional resource allocation in general and policies in particular.

Various statistical approaches have been used to examine the empirical relationship between unemployment, GDP and inflation. These include time series analysis, geographic panel-data models, panel regression, Granger causality testing, and regression analysis (Abdullah et al. 2020; Batrancia 2021a, 2021b; Batrancia et al. 2022; Ben and Ciftcioglu 2017; Phillips 1958; Schubert and Are. Crawl 2016; Simona et al. 2019). Many of these approaches relied on linear and stationary assumptions to characterize time series relationships and quantify temporal-interval time series changes (Yu and Lin 2015). However, due to the impact of political instability (Mtshanda 2022), climate change (Wendimu 2021), the COVID-19 pandemic (Hensher 2020; ILO 2020) and similar socioeconomic factors, the interaction between unemployment, GDP and Inflation in Ethiopia can often vary over time and present a non-stationary relationship. In this paper, we apply the cross-wavelet transform (XWT) method to study the relationship between unemployment, GDP and inflation in Ethiopia. XWT identifies relationships between non-stationary time series by measuring the correlation between two time series in the time-frequency domain (Banerjee and Mitra 2014; Day et al. 2010; Grinstead et al. 2004). Furthermore, to examine time-varying correlations among the three indicators, this paper employs a multivariate Student-t generalized autoregressive score (GAS) model (Creel et al. 2013; Harvey 2013). This model provides policy makers with new analytical tools to capture the dynamic characteristics between the three indicators (Jiang et al. 2022). The study also used autoregressive distributed lag

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