Multivariate Generalized Autoregressive Conditional Heteroscedasticity Modeling of the Relationship Between Major Economic Indicators in Ethiopia

Daba Ketema Huriso, Belay Belete Anjullo (), Yilikal Tesfaye Haile and Derbachew Asfaw Teni
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Daba Ketema Huriso: Bule Hora University
Belay Belete Anjullo: Arba Minch University
Yilikal Tesfaye Haile: Arba Minch University
Derbachew Asfaw Teni: Addis Ababa University

Journal of the Knowledge Economy, 2024, vol. 15, issue 2, No 81, 7127-7142

Abstract: Abstract We model the relationship between major economic indicators in Ethiopia. We obtained 28 years of data from the National Bank of Ethiopia (NBE) for the period between 1991 and 2018, these data have been transformed into quarterly data. It was seen that there are upward trend and volatility clustering in the data. Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) models were employed for volatility modelling with the specific interest in identifying the trend and the impact of macroeconomic variables on economic growth. Results from Dynamic Conditional Correlations (DCC (1,1))-GARCH model showed the sum of ARCH and GARCH effect was 0.672. This implied volatility is neither permanent nor explosive, that is a shock to volatility in one period will not lead to greater volatility in the next period. It was also found that the estimated association parameter between consumer price index which is proxy for inflation and real gross domestic product was -0.557, this shows negative association between inflation and real gross domestic product. Furthermore; volatility on exchange rate and money supply has a significant positive association with volatility on real gross domestic product and inflation. NBE should be cautious in controlling the money supply to control the problem of inflation, since the increase in money supply increases inflation, and inflation affects economic growth.

Keywords: Major economic indicators; Gross domestic product; Economic growth; Multivariate GARCH model (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s13132-023-01422-6

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