Author(s): Fentahun Yeshaneh Nigatie and Sefinew Gebeyehu Kebede
This study aims to investigate the relationship among Macroeconomic variables annually collected data from the national bank of Ethiopia, Central Statistical Agency, and World Bank website from a period of 1980-2018 by using BVAR approach. Based on a study, granger causality shows unidirectional the change in consumer price index (inflation) and unemployment leads to changes to real GDP growth. Similarly, unidirectional from UR to CPI shows that unemployment leads to a change in inflation. Empirical results of impulse response function analysis show that shock to RGDP leads to a negative response from unemployment which dies out after four years horizons, while the shock to RGDP from inflation of goods and services produces continuous positive responses. BVAR is the appropriate model used to forecast and estimate large macroeconomic variables by reducing the gap between actual and predicted values. The policy implication of this finding is that country should control unemployment and interest by creating different small enterprise led industrialization strategy and expands the investments for Youth.