Inflation dynamics and economic growth in Rwanda (2006Q1-2019Q4

Abstract

It is now widely agreed among economists, policy makers and central bankers that the main objective of macroeconomic policies is to achieve a high economic growth rate while maintaining a low inflation rate; it is also believed that a high inflation has an adverse effect on economic growth. But how low should be the inflation rate not to impact negatively on economic growth? Monetary authorities in Rwanda have been targeting an inflation level of around 5% for economic policy purposes. Was this inflation target the most appropriate for economic growth? In the current work, it is intended to assess the dynamism of inflation and economic growth over the period 2006Q1-2019Q4using econometric approach .general objective of the work was to assess the dynamism of inflation on economic growth with specific objective to identify existence of a long run or short run relationship between inflation and economic growth in Rwanda economy, to measure the degree of responsiveness of change in GDP growth rate due to change in general price level. The estimated results of 1% change to inflation increased economic growth by 0.03%,1% change to investment increased economic growth by 0.04%.1% depreciated on exchange rate increased economic growth by -0.21%, the degree of responsiveness , the results of responsiveness showed that the price is elastic as the elasticity value(1.33) is greater than 1, and it implies that one unit change in inflation increased economic growth by 1.33 Per cent, where its R 2 is equal to 0.944477 , the results also indicated that economic growth and inflation affect each other positive In long-run during the period of the study. The researcher founded that the short-run variable that can help policymakers to predict economic growth were exchange rate (endogenous variable). I am inviting ministry of finance and economic planning and other economic agents to apply exchange rate policy for better economic growth.