FINANCIAL DEVELOPMENT SECTOR AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

The finance growth nexus, though it is well-entrenched in the academic discourse and no consensus is reached, still begs for updating through revisiting the issue using recent data. With this motivation, this study has attempted to achieve the objective: examining the financial sector development and economic growth in Ethiopia and their causality based on the time series data set covering the period of 1974/75 to 2019/20 in Ethiopia, using Eview9 software. From a methodological perspective, unit root tests, Johansson’s co integration test, vector error-correction model, impulse response analysis, variance decomposition analysis and granger causality tests were utilized. The finding of this study shows that financial development sector, gross capital formation /investment/, saving and government expenditure have a positive and statistically significant relationship with GDP in the long run. In the short run, the study confirms that one year lagged value of financial development and savings are positive and statistically significant affecting current growth of RGDP. The study also found that there is no causality running from either financial development sector to economic growth or from economic growth to financial development both in the long run and short run. The short run speed of adjustment coefficient of -0.247 indicates that 24.7 % of the short run adjustment made within a year. Finally, the study recommends the policy towards the path of a sustainable growth and the effects of financial sector on economic growth must be taken into consideration.