Modeling the long-run relationship between inflation and economic growth in Zimbabwe: a bi-variate cointegration (Engle-Granger Two-Step) approach

NYONI, THABANI and MUTONGI, CHIPO (2019): Modeling the long-run relationship between inflation and economic growth in Zimbabwe: a bi-variate cointegration (Engle-Granger Two-Step) approach.

Abstract

The debate on the nexus between economic growth and inflation is generally inconclusive and yet inevitably interesting. This study makes a contribution to the existing debate by empirically investigating the relationship between inflation and economic growth in the context of Zimbabwe. Using time series data spanning from 1960 up to 2017, the study employs the Engle – Granger Two Step modeling technique in order to analyze the relationship between inflation and economic growth in Zimbabwe. Our findings indicate that there is a negative and statistically significant relationship between inflation and economic growth both in the short – run and long – run. The speed of adjustment to equilibrium is approximately 62% annually when the variables wander away from their equilibrium values. Amongst other policy prescriptions, the study recommends inflation targeting policy in order to stimulate growth while maintaining price stability in Zimbabwe.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration; economic growth; Error Correction Mechanism (ECM); inflation; Zimbabwe
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

1. Ahiakpor, F & Akapare, I. A. (2014). Short – run and long – run inflation and economic growth nexus in Ghana, GJDS, 11 (2): 32 – 49.

2. Atkinson, B & Milward, K. (1998). Applied Economics, p. 369 Macmillan Business, London.

3. Ayyoub, M., Chaudhry, I. S & Farooq, F. (2011). Does inflation affect economic growth? The case of Pakistan, Pakistan Journal of Social Sciences (PJSS), 31 (1): 51 – 64.

4. Behera, J. (2014). Inflation and its impact on economic growth: evidence from six South Asian countries, Journal of Economics and Sustainable Development, 5 (7): 145 – 155.

5. Blanchard, O. J & Fischer, S. (1989). Lectures on Macroeconomics, MIT Press, Cambridge MA, USA.

6. Cagan, P. (1956). The monetary dynamics of inflation: in Studies in the Quantity Theory of Money, ed. Milton Friedman, 25 – 117, University of Chicago Press, Chicago.

7. Capie, F. H. C. (1986). Conditions in which very rapid inflation has appeared, Carnegie – Rochester Conference Series on Public Policy, 24: 115 – 168, Elsevier – Science Publishers, North – Holland.

8. Charkie, P. (2012). Was dollarization a success in Zimbabwe? A case of a banking sector. http://www.studymode.com

9. Chhibber, A. J., Cottani, R., Firuzabadi, F & Walton, M (1989). Inflation, price controls and fiscal adjustment in Zimbabwe, Working Paper No. WPS 192, The World Bank, Washington DC.

10. Chimobi, O. P. (2010). Inflation and economic growth in Nigeria, Journal of Sustainable Development, 3 (2): 159 – 166.

11. Dzvanga, M. (1995). The determinants of inflation in Zimbabwe, Economics Working Papers, University of Zimbabwe, Harare.

12. Engle, R. F & Granger, C. W. J. (1987). Cointegration and error correction: Representation, estimation and testing, Econometrica, 55: 251 – 276.

13. Engle, R. F & Yoo, B. S. (1987). Forecasting and testing cointegrated systems, Journal of Econometrics, 35 (1987): 143 – 159.

14. Erbaykal, E & Okuyan, H. A. (2008). Does inflation depress economic growth? Evidence from Turkey, International Research Journal of Finance and Economics, 17: 1450 – 1470.

15. Fischer, S., Ratna, S & Carlos, V. (2002). Modern hyperinflation and high inflations. IMF Working Paper – WP/02/197, IMF Research Department.

16. Games, D. (2005). The Zimbabwe Economy: how it has survived and how it will recover. https://dspace.africaportal.org/jspui/bitstream/12345678/9/30178/1/no.30

17. Granger, C. W. J. (1981). Some properties of time series data and their use in econometric model specification, Journal of Econometrics, 16: 121 – 130.

18. Hasanov, F. (2010). Relationship between inflation and economic growth in Azerbaijani economy: is there any threshold effect? Asian Journal of Business and Management Sciences, 1 (1): 6 – 7.

19. Hussain, S & Malik, S. (2011). Inflation and economic growth: evidence from Pakistan, International Journal of Economics and Finance, 3 (5): 262 – 276.

20. Ihugba, O. A., Ebomuche, N. C & Ezeonye, R. C. (2015). Relationship between economic growth and inflation in Nigeria (1970 – 2013), International Journal of Research in Business Studies and Management, 2 (7): 14 – 22.

21. Lewis, M & Mizen, P. D. (2000). Monetary Economics, Oxford University Press, New York, USA.

22. Majumder, S. C. (2016). Inflation and its impacts on economic growth of Bangladesh, American Journal of Marketing Research, 2 (1): 17 – 26.

23. Makochekanwa, A. (2007). A dynamic enquiry into the causes of hyper – inflation in Zimbabwe, Working Paper Series 2007 – 10, University of Pretoria, Pretoria.

24. Marbuah, G. (2010). The inflation – growth nexus: testing for optimal inflation for Ghana, Journal of Monetary and Economic Integration, 11 (2): 71 – 72.

25. Mohaddes, K & Raissi, M (2014). Does inflation slow long – run growth in India? IMF Working Paper WP/14/222, International Monetary Fund, pp: 01 – 19.

26. Mpofu, R. T. (2015). Dollarization and economic development in Zimbabwe: an interrupted time series analysis. Risk Governance and Control: Financial Markets & Institutions, 5 (4): 38 – 48.

27. Mubarik, Y. A. (2005). Inflation and growth: an estimate of the threshold level of inflation in Pakistan, State Bank of Pakistan – Research Bulletin, 1 (1): 35 – 44.

28. Munangagwa, C. L. (2011). The economic decline of Zimbabwe, Gettysburg Economic Review, 3 (9): 1 – 22.

29. Nyoni, T & Bonga, W. G. (2017). Population growth in Zimbabwe: A Threat to Economic Development? Dynamic Research Journals Journal of Economics and Finance (DRJ – JEF), 2 (6): 29 – 39.

30. Nyoni, T & Bonga, W. G. (2018). What determines economic growth in Nigeria? Dynamic Research Journals Journal of Business and Management (DRJ – JBM), 1 (1): 37 – 47.

31. Paradza, G. (2011). Inflation in Zimbabwe. http://dspace.africaportal.org/jspui/bitstream/12345678/30621/1/pia23_1.pdf?1

32. Phillips, P. C. B & Qualiaris, S (1990). Assumption properties of residual based tests for cointegration, Econometrica, 58 (1): 165 – 193.

33. Phillips, P. C. B. (1991). Optimal inference in integrated systems, Econometrica, 59: 283 – 306.

34. Pindiriri, C & Nhavira, J. (2011). Modeling Zimbabwe’s inflation process, Journal of Strategic Studies.

35. Pindiriri, C. (2012). Monetary reforms and monetary dynamics in Zimbabwe, International Research Journal of Finance and Economics, 90 (2012): 217 – 222.

36. Sachs, J & Larraine, F (1993). Macroeconomics in the global economy, Prentice Hall, New York.

37. Siklos, P. L. (2000). Inflation and hyperinflation, Wilfrid Laurier University, Waterloo, Ontario.

38. Stock, J. H & Watson, M. W. (1988). Variable trends in economic time series, Journal of Economic Perspectives, 2 (3): 147 – 174.

39. Sunde, T. (1997). The dynamic specification of the inflation model in Zimbabwe, Economics Working Papers, University of Zimbabwe, Harare.

40. Umaru, A & Zubairu, A. A. (2012). Effect of inflation on the growth and development of the Nigerian economy (an empirical analysis), International Journal of Business and Social Science, 3 (10): 183 – 191.

41. Walsh, C. (1998). Money and monetary policy, MIT Press, Cambridge MA, USA.