The Nexus between Financial Development and Economic Growth in Ethiopia
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Date
2016-03
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Addis Ababa University
Abstract
The paper examined the empirical relationship between economic growth and financial
development in Ethiopia over the period 1980–2014. The long-run and short-run parameters
were estimated with a use of autoregressive distributed lag (ARDL) bounds testing approach
for co integration analysis. To determine the direction of causality, Granger causality
analysis was done. Empirical findings indicate,there is long-run associationbetween
economic growth and proxy of financial deepening, broad money and private sector credit
while proxy of financial widening, trade openness has positive significant relationship with
economic growth but financial liberalization has negative significant association with
economic growth. The overall result indicates economic growth has a significant positive
effect on financial development. The magnitude of the ECT coefficient is -0.8545 justified
about 85% of the disequilibrium annually converge towards long run equilibrium in the
following year. The Granger causality testis consistent with the co-integration result
indicating uni-directional causality between financial development and economic growth in
Ethiopia for the period under study.The result supports demand following hypotheses;means
that economic growth is leading to the financial sector development in Ethiopia. Hence,
confirm the heavy hand of the government in the financial sector.
Keywords: financial development, economic growth, ARDL bounds test, cointegration,
granger causality
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Keywords
Financial development, Economic growth, ARDL bounds test, Cointegration, Granger causality