The Impact of Public Final Consumption and Investment Spending on Economic Growth in Ethiopia: An Application of Vector Error Correction Model

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Addis Ababa University


The objective of this paper was to investigate the impact of public sector investment and final consumption expenditure on economic growth using time series data on Ethiopia (for 54 years). In addition, it intended to explore the pattern and relative impact of public and private consumption and investment decision on the economy. I formulate a simple growth accounting model, adapting Ram (1986) in which total government expenditure is disaggregated into expenditure on (physical) investment and final consumption. The analysis is based on time series data covering the period 1960-2014. The study applies the augmented Dickey Fuller test for stationarity and Johansson co-integration test used to determine whether there is a long run relationship between variables. Vector error correction model is applied to estimate both short and long run models related with Real Gross Domestic Product of Ethiopia. The empirical results suggest that in the long run government investments and final consumption has positive and negative effect on economic growth, respectively. Similarly, private investment, private final consumption and primary education enrolment rate have positive effects on economic growth. However, all variables included in the model except government consumption do not have an impact on economic growth in the short run



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