Financial Innovation, Monetary Policy and Economic Growth in Ethiopia

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The objective of this study is to explore the relationship among financial innovation, monetary policy, and economic growth of Ethiopia for the period spanning from 1980–2018. In order to analyze the long-run and short-run relationship between real GDP per capita growth rate (dependent variable) and its drivers, the study employed Autoregressive Distributed Lag (ARDL) Approach to Co-integration and Error Correction Models. Furthermore, the Granger-causality test is also applied in order to identify the directional causality among financial innovation, monetary policy and economic growth under the pair wise granger causality frame work. The empirical results revealed that both gross fixed capital formation and government expenditure are found to have positive association with economic growth and statically significant in the long run and in the short run. However, consumer price index and broad to narrow money ratio (LM2/M1, proxy for financial innovation) are found to have negative and statistically significant association with economic growth in the long run. However, consumer price index also has a relationship to growth, which is negative and significant. Added to this, is that the results from the Granger-causality test support unidirectional causality running from financial innovation to economic growth and to monetary policy, and from monetary policy to economic growth.



Innovation, financial innovation, economic growth, Ethiopia, monetary policy, ARDL