Impact of Macroeconomic Instability on Economic Growth and Private Capital Accumulation in Ethiopia
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Date
2015-06
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Addis Ababa University
Abstract
Analyzing impact of macroeconomic instability on economic growth and private capital
accumulation from the year 1974 to 2013 is the main objective of the study. Rather than using
one variable as a proxy for macroeconomic instability, the researcher attempts to calculate
macroeconomic instability index by using four variables: budget deficit, public debt, exchange
rate variability and inflation by utilizing UNDP HDI methodology. In specification of regression
equations, endogenous growth model and accelerator model are used for growth and capital
accumulation equation respectively. Empirical analysis has been performed by using Johansson
maximum likelihood method, the result shows that there is a long run relationship among the
variables entered in both models. Both the long run and short run result shows that,
macroeconomic instability has a detrimental effect on both economic growth and private capital
accumulation. Based on the finding, the major policy implication of this study is that, poor
management of macroeconomic with the adoption of incorrect and illogical fiscal and monetary
policies and passive reaction against shocks will intensify the macroeconomic instability. Due to
this, the way of reaction to the shocks is very important
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Economic Policy Analysis