Econometric Analysis of Macroeconomic Determin ants of Private Investment in Ethiopia

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The paper has developed private investment model of the Ethiopian case since private investment is the main factor for economic growth , alleviation of poverty and the upgrading of social capital and services. Added to this, interest in private investment also grew overtime because of its sensitivity to policy environment r elative to public investment. These developments further accentuated interest in the determinants of private investment in. developing countries . Most developing countries rely on exchange rate devaluation, higher domestic interest rates and a mix of fiscal and credit contraction policies f or establishing of aggregate demand. The main interest for the study is to access effect of changes in macroeconomic policies on private investment . The key aspect of our methodology is the application of co integrated VAR model. The use of co integrated VAR model helps account for spurious correlation and erogeneity bias as it is designated for no stationary time series , and requires no endo-exogenous division of variables . And vector error correction models (VEMSI introduced in co integrated VAR technique distinguish clearly between long run and short run impacts , providing a suitable tool for policy analysis. The results suggest that the overall effect public investment had a crowding in impact on the private investment over the study of the period , in the long run and short run. On the other, hand the impact of devaluation policy has significant and positive on private investment in the longer but it is insignificant on the short run. Monetary policy in the form of restricting domestic credit appears to have had a significant impact on private investment. This is well indicated by the significant positive impact of banking sector credit on the private investment, suggesting that a restrictive monetary policy may lead to shrinking private capital formation by tightening financial constraint on private forms. Real output or demand reports significant direct long run and short run effect on private investment over the period of the study. The positive significant relation provides for the validity of the hypothesis that accelerator principle does explain private sector investment. Increase in real interest rate indicating that costs of funds did matter for private investors in Ethiopia. Macroeconomic instability proxies by the variability of the inflation rate and terms of trade have insignificant impact but real GOP volatility has significant and negative impact .



Macroeconomic Determinants, Private Investment