Journal of Applied Economic Research
ISSN 2712-7435
Using Models of the GARCH Family to Estimate the Level of Food and Non-Food Inflation in Ethiopia
T.H. Abebe
Ambo University, Ambo, Ethiopia
Abstract
An increase in inflation volatility implies higher uncertainty about future prices. As a result, producers and consumers can be affected by the increased inflation volatility, because it increases the uncertainty and the risk in the market. Thus, inflation volatility attracts the attention of researchers to find a suitable model which can predict the future conditions of the market. This study aims to fit appropriate ARMA-GARCH family models for food and non-food inflation rate of from the period January 1971 through June 2020. Since the main objective of the study is identifying an appropriate model for inflation series, the null and alternative hypotheses are defined in comparison of the two types of models. H0: The symmetric GARCH models better capture inflation volatility of Ethiopia. H1: The asymmetric GARCH models better capture inflation volatility of Ethiopia. The ARMA-GARCH family models were applied to capture the stylized facts of financial time series such us leptokurtic, volatility clustering and leverage effects. The mean model results show that, an ARMA (1, 2) and ARIMA (0, 1, 1) models are identified as the best fitted model for food and non-food inflation, respectively. From the estimation results of volatility model, an asymmetric TGARCH (1, 1) model with Student's t- distributional assumptions of the residual is the best model for non-food inflation. Thus, modeling of information, news of events is very significant determinants of volatility and GARCH family models are appropriate for the given series (monthly food-inflation volatility) of Ethiopia under the study period considered.
Keywords
food inflation; non-food inflation; ARMA-GARCH family; Ethiopia.
JEL classification
С10, С53References
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Acknowledgements
First, I would like to thank the Almighty God, for being with me in all aspects during my study. My thanks go to the staff member of the National Bank of Ethiopia, Mr. Bizuayehu Samuel for his cooperation during the time of data collection. At last, my deepest and heartfelt gratitude goes to my wife Mrs. Misa Getu for her encouragements and support throughout my study.
About Authors
Abebe Teshome Hailemeskel
Senior lecturer, Department of Economics, College of Business and Economics, Ambo University, Ambo, Ethiopia (P.O. Box, 19, Ambo, Ethiopia); ORCID 0000-0001-7736-1814; e-mail: teshome251990@gmail.com.
For citation
Abebe T.H. Using Models of the GARCH Family to Estimate the Level of Food and Non-Food Inflation in Ethiopia. Journal of Applied Economic Research, 2021, Vol. 20, No. 4, 726-749. DOI: 10.15826/vestnik.2021.20.4.028.
Article info
Received July 19, 2021; Revised September 6, 2021; Accepted October 10, 2021.
DOI: http://dx.doi.org/10.15826/vestnik.2021.20.4.028
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