Short Run Impact of Public Finance on Inflation Rate in Ethiopia; Empirical Evidence with Time Series Analysis (1974/75-2018/19)

Abstract

According to various schools of economic thought there are many source of inflation. Nonetheless the source of it in each country may not be a source of inflation for other countries. Even if detecting the influence of public finance on inflation rate is the main concern to both developing and developed nations for their economic policy.  As the recorded statistics implied that the Ethiopian government has high budget deficit, external debt, and high government expenditure and low tax revenue. For that reason the main objective of the present study was to test the impact of external debt, government expenditure, government budget deficit and tax revenue on inflation rate in Ethiopia by using annual time series data which run from 1974/75 to 2018/19. The researcher used ADF unit root test, PP-unit root test, short run ARDL model and diagnostic test. The study result inferred that there is no variable which become stationary at second difference which means the listed variables are stationary al level and first difference. The short run ARDL model verified budget deficit and government expenditure has positive impact, but tax revenue and external debt has negative impact on Ethiopian inflation rate. All diagnostic tests showed there is no problem on short run model. Based on the study result it is better to focus on minimizing government expenditure and increasing government revenue.

Keywords: Ethiopia, Inflation Rate, Public Finance, Short Run Impact

DOI: 10.7176/JESD/11-9-06

Publication date:May 31^st 2020