An Investigation of the Macroeconomic Determinants of Private Investment in Ethiopia: Co-integarted var Approach

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Addis Ababa University


This study was conducted with the main objective of investigating and analyzing the macroeconomic determinants of private investment in Ethiopia over the period from 1974/75-2013/14. The study employed Vector error Correction model to estimate the long run relationship of the variables. The regression results shows that real physical infrastructure investment, real social infrastructure investment , trade openness and bank credit have significant positive long run effect on private investment, where as inflation has significant negative long-run effect. In the short run economic growth have significant positive impact on the real private investment. The result of the regression suggests the crowding in effect of the real physical infrastructure investment and real social infrastructure investment on real private investment in Ethiopia in the long run. Moreover, the result of the regression confirm the validity of accelerator model which states investment is the linear proportion of output in the context of Ethiopia. Thus require the need to extend the growth of national output to raise the growth of private investment. Hence, as policy implication the study recommends government provision of fertile macroeconomic and investment climate. Moreover, investment in physical and social infrastructure in line with other supplementary reforms to enable the private investment to contribute more to the gross domestic product should need to be extended. Key words : private investment , vector error correction model , economic growth



private investment, vector error correction model, economic growth