Impact of economic sectors on inflation rate: Evidence from Ethiopia

Abstract

It is unclear how sectoral growth in the agriculture, industrial, and service sectors affects inflation, and the topic is also quite rare. Accordingly, the researchers in this paper examine the long- and short-term effects of agriculture, service, and industry sectors on inflation rates. In order to achieve this, the researchers applied an autoregressive distributed lag model from 1975 to 2019. In order to determine the direction of causation, the Granger causality test was conducted. The results clearly demonstrate the negative relationship between agriculture, services, population, and inflation over the long term. In the short run, previous inflation, the service sector, the second lag in population, and the agricultural sector do not reduce inflation. The industrial sector and the first lag of the population can lower inflation rates. Thus, the industry sector in the long run and the service and agricultural sectors in the short run are inefficient at reducing inflation. Inflation and the agricultural sector are causally linked in both directions. Additionally, unidirectional causality runs from industry and the service sector to inflation. Early researchers have not examined the impact of the service, industry, and agriculture sectors on inflation rate, thus offering a unique contribution to policy makers. Panel data are not used to compare the sectoral responsibility for reducing inflation in other African countries with researchers. Practically, the agriculture and service sectors on the short run, along with the industry sector on the long run, both need attention.

Keywords:

• agriculture sector
• Ethiopia
• inflation rate
• industry sector
• service sector

JEL Classifications:

• E23
• E31
• L8
• Q1

PUBLIC INTEREST STATEMENT

The inflation rate can be used as a gauge of an economy’s health. The impact of economic sectors on inflation rate is rarely examined empirically. This paper fills the gap by looking into the long- and short-term effects of economic sectors on inflation rates. Agriculture, service, and population have a negative relationship with inflation over the long run. On the short run, industrial growth can lower inflation rates. Agriculture and inflation are causally linked in both directions. Furthermore, unidirectional causality runs from industry and the service sector to inflation. In three ways, our paper differs from past research. The study uses long-term data to focus on economic sectors for the first time. Our study also uses advanced econometrics for the long run and short run. Thirdly, this study uses economic sectors as independent variables, offering a unique contribution to policy makers and raising the question of which sector needs more focus in order to control Ethiopia’s alarming rates of inflation. On the short term, agriculture and services need attention, as do industries on the long-term.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

For this research, the authors did not receive any funding.

Notes on contributors

Endashaw Sisay

Endashaw Sisay holds Master of Science in economics from Jimma University. Now he is lecturer at Mizan Tepi University, department of economics. His research interests include, financial economics, econometrics and industrial economics.

Wondimhunegn Atilaw

Wondimhunegn Atilaw holds Master of Science in economics from Jimma University. Now he is lecturer at Mizan Tepi University, department of Economics. His research interests include financial economics, macroeconomics and environmental economics.

Tecklebirhan Adisu

Tecklebirhan Adisu got his Masters of Science in Marketing Management from Bahirdar University. Now he is lecturer at Mizan Tepi University, department of Marketing Management. His research focuses on consumer behavior, profitability of companies and society welfare.