The Effects of Macroeconomic Factors on Private Investment in Ethiopia
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Date
2007-03
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A.A.U
Abstract
Private investment plays indispensable role in fostering economic growth, alleviating poverty
and in upgrading social capital and services. Understanding the different factors affecting
private investment in developing countries ill general and in Ethiopia in particular, has a
paramount importance.
This study tries to model some of the macroeconomic factors that affect private investment in
Ethiopia during the period J 964/65-2004/05 based on the argument that private investment
in developing countries is externally constrained apart from being affected by risk and
uncertainty variables. The study employs the vector auto regression (VAR) methodology that
account for spurious regression and erogeneity bias. This methodology also provides
suitable tool for policy analysis by distinguishing the long and short-run impacts of the
explanatory variables.
The result indicates that over the last four decades (J 964/65-2004/05), economic growth,
foreign exchange availability and trade flows stimulate private investment both in the long
and short-runs. The positive effect of foreign exchange availability is found to be relatively
strong supporting the argument that private investment in developing countries is externally
constrained.
The study also suggests that public investment on economic and social infrastructure has a
crowding-in effect and this effect is observed only in the long-run. Furthermore, domestic
inflation rate appears to stimulate private investment in the short-run.
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Keywords
Macroeconomic Factors, Private Investment