Abstract:
The relationship between inflation and economic growth has been a challenging debate among academicians, some researchers emphasize argue that inflation has negative impact on economic growth, others argue that inflation stimulates the economic growth when it is moderate. In this regard the overall objective of this study was to investigate the effects of inflation dynamics on economic growth in Rwanda. This study employed econometric approach in data analysis. This study provides an empirical analysis of observed data from 2010 Q1 to 2022 Q4 on GDP, CPI, EXR, and M3. Unit root test was conducted in order to know if the data are stationary. The co- integration approach was employed to investigate the long-run relationship between economic growth and variables mentioned above. VEC is used model to study economic growth in Rwanda due to its nice interpretation with long term and short term equations, Vector error correction model is just a representation of co integrated Vector Auto regression (VAR). But we first assessed the order of integration of variables, and then assessed co integration among the variables (Long-run relationship) and short-run adjustments to retain the long-run equilibrium. Finally we have analyzed the dynamic relationship between inflation dynamics and economic growth in Rwanda.
The results gave an indication for the existence of a long-run relationship between economic growth (GDP), inflation (CPI), Exchange rate (EXR) and broad money supply (M3). The size of the speed of adjustment (-0.326) shows that the economy will converge towards the long run equilibrium. The empirical results show that inflation, exchange rate, and broad money supply are statistically significant to explain economic growth (GDP) in the short run. The study concludes with recommendation to adopt policy that maintain inflation at a moderate level as well as to diversify economy of the country by formulating good trade policy, attract more foreign direct investment, improve infrastructure and create good business environment in order to expand the economic activities.
