THE IMPACT OF INFLATION ON ECONOMIC GROWTH CASE STUDY OF SOMALIA
This study investigates the impact of inflation on the economic growth of Somalia over the period 1991 to 2015. Typically, this relationship has been analyzed using simple correlations and deterministic models. In this analysis, a tri-variate model is used, incorporating the unemployment rate into the framework for analysis, we capture the policy trade-off between managing inflation at a low rate and targeting low unemployment as described by the Phillip curve hypothesis. After checking the series for unit root by using the Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) tests, we identified that all the variables are stationary at the first difference, that is I~(1). Furthermore, Engle-Granger Cointegration test was employed to check if there is a long-run equilibrium between the variables, results from this test showed that the variables were Co- integrated, which means a long-run equilibrium exists between the variables. The study explores the existence of a negative relationship between inflation and economic growth in Somalia. In addition, we estimate the vector error correction model and the result indicates there is convergence among the variables in the long run. The speed of adjustment or the value of the coefficient for error correction term was just under fifty percent which indicates almost 50% of the deviation of the inflation from its short-run equilibrium level is corrected each year.
Inflation, Unemployment, Economic Growth