The U-shaped Ethiopian Phillips curve - war, drought and monetary policy

The U-shaped Ethiopian Phillips curve - war, drought and monetary policy
Some time ago I started my a little project to focus a bit on monetary reform in Africa - Project African Monetary Reform (PAMR). I am afraid I have failed to as much on Africa monetary matters as I would like. However, this post is an attempt to catch up a bit on that. I have earlier written about the   The first suggestion I got was to have a look at the apparent negative relation between inflation and real GDP growth in Ethiopia and the causes of this relationship. I think this is a great suggestion as it quite well illustrates some challenges to monetary policy that we are likely to find in most African countries. Normally the Phillips curve is expected be a positive relationship between inflation and real GDP growth or a negative relationship between inflation and unemployment. I don't have access to reliable Ethiopian unemployment data so will focus on the relationship between real GDP growth and unemployment. Below you see the RGDP growth and inflation in Ethiopia since 1980. It is quite clear that we have three difference phases in the relationship between RGDP growth and inflation in the past 30 years in Ethiopia. 1980-1991: Drought and War  We all remember the massive famine that hit Ethiopia in the early 1980. At that time Ethiopia was a totalitarian communist state and the country was suffering from the double-crisis of massive droughts and civil war. Both war and drought are negative supply shocks and we would therefore expect a negative relationship between growth and inflation. And that is exactly what we saw in the 1980s. Back in the 1980s most Ethiopian were farmers and nearly all of GDP was agricultural production (when we ignore the substantial resources wasted on military spending). The 1980s was extreme, but it is still the case that most Ethiopians are (self) employed in the agricultural sector and most of private GDP is made up of agricultural production. As a consequence the the general climate and particular the risk of returning droughts is likely to continue to have massive impact on changes in real GDP from HT Jens Pedersen


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