THE IMPACT OF INFLATION ON ECONOMIC GROWTH IN RWANDA (1995-2022)

Abstract

This research aims to assess the impact of inflation on economic growth in Rwanda from 1995 to 2022. Key objectives include examining the trend of inflation and analyzing the relationship between inflation and Rwanda's economic growth. By analyzing historical trends and using a Vector Error Correction Model (VECM), the study highlights the minimal positive effects of inflation on economic growth and stresses the need for a more sophisticated approach. The study utilizes econometric models such as the Johansen cointegration test and the block homogeneity, Granger causality test, concluding that inflation exerts a negative long-term effect on economic growth. Specifically, inflation influences exchange rate volatility, further aggravating economic instability. The results indicate that inflation hinders growth, emphasizing the need for monetary authorities to implement policies targeting inflation more aggressively. The study suggests that Rwanda’s monetary authorities strengthen their supervision and regulatory frameworks while enhancing policies that improve money supply management to sustain economic growth. Key findings suggest that inflation negatively impacts investment and the exchange rate, contributing to economic slowdown. The paper recommends continuous efforts toward macroeconomic stability, promoting private sector credit and investment to support growth. Moreover, the research highlights the necessity for precise inflation control to foster an environment conducive to sustained economic expansion.