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Does Inflation Hamper Domestic Credit To Private Sector In Ethiopia?

Author: HAILU ADUGNA
Published in IJED, Vol. 13 No. 1

The study examines the effect of inflation on domestic credit to private sector in Ethiopia using inflation and Gross National Savings as regressors. From the Autoregressive Distributed Lag model, we confirmed presence of a unique co-integrating equation among the variables. Our long run results show a significant negative effect of inflation (proxied by consumer price index) on domestic credit to private sector, whereas gross national saving has strong positive impact. The dynamic results from Error Correction Model suggest that inflation substantially depresses availability of domestic credit to private sector in the short run too. Given the usually high and volatile inflation in Ethiopia, this result is highly anticipated. On the other hand, from the short run dynamic results, a strong positive causation is evidenced between domestic credit to private sector and its lagged values. Our findings imply that maintaining reasonable level of inflation and boosting national savings are requisite in expanding and sustaining domestic credit to private sector in Ethiopia.

Keywords: Effect of Inflation, Availability, Domestic Credit, Private Sector, Ethiopia

JEL CLASSIFICATION: E51. G21. O16

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