Macro Economic Implications of Financial Market Liberalization in Ethiopia
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Date
2005-06
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A.A.U
Abstract
This study has tried to assess the practical implications of financial market
development and liberalization on macroeconomic variables like saving,
investment, inflation and Economic growth in Ethiopia, using a time series data
covering the period 1974/75 -2003/04. The Johansen Maximum likelihood
estimation procedure has been employed to see the short and long-run dynamics
of selected financial variables and major macroeconomic variables.
To test the Mckinnon-Shaw hypothesis that removal of repressive policies and
development of financial markets can enhance saving, investment and ultimately
growth; the life-cycle saving model, the flexible accelerator model, Fry's inflation
and Growth model were used as theoretical foundations.
The result indicated that saving is positively and significantly affected by the real
deposit rate of interest and income growth. Domestic investment has a positive
long-run equilibrium. relationship with output growth whereas the real
depreciation of the exchange rate and an increasing level of government debt on
domestic financial system were found to affect investment negatively. Inflation
was found to be non-responsive to the growth in per capita stock of money supply
and income, reflecting the structural rigidity of the economy.
Finally, liquid liabilities of the financial system showed a significant and positive
relationship with growth in per capita income whereas variables which proxy
private sector credit growth were found to be insignificant in both the saving and
growth junctions.
Nevertheless, this study has certain limitations, i.e. it doesn't consider the
informal and semi-formal financial markets in the analysis due to in availability of
organized data.
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Keywords
Financial Market, Liberalization in Ethiopia, Macro Economic Implications