The Existence of Phillips Curve theory in Ethiopia

Abstract

To continue Ethiopia’s successful path towards becoming a middle income country, it is an important issue focusing on macroeconomic variables. In this modern world inflation and unemployment’s are a most sensitive issue and needs critical attention to overcome problems which come from those two macroeconomic variables. Thus, the objective of the study was to investigate the long run and short run relationships, plus to this to look the causality between inflation rate and unemployment in Ethiopia. The study utilized Augmented Dickey-Fuller test, Auto Regressive Distributed Lag model and Granger causality test by using Vector Error Correction Model with a time spam of 1984/85-2019/20. The finding appears unemployment (contrarily and pitifully) and expected inflation (positively) has long run impact on the current inflation rate. Within the short run as it were anticipated inflation (positively) affect inflation rate but there's no short run relationship between inflation rate and unemployment rate. From this, the researcher proofs that Phillips curve exist in long run (contrary to 1970’s theory), not in short run (contrary to 1950 and 1960’s theory). At long last, the study suggests the government ought to center on fiscal approach which plays an incredible part on unemployment decrease and money related arrangement for inflation rate. Besides, a government ought to maintain a strategic distance from fumble on outside obligation utilization and outside coordinate venture. The government ought to alter the populace growth to economic progress.

Keywords:Augmented Phillips curve, Ethiopia, Inflation, Unemployment

DOI: 10.7176/JESD/13-11-03

Publication date:June 30^th 2022