Determinants of CapitaI Market DeveIopment in Ethiopia
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Date
2026-06-02
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Addis Ababa University
Abstract
Capital market development plays a vital role in mobilizing long-term savings, promoting
investment, and supporting economic growth. This study examines the relationship between
inflation, interest rates, and capital market development in Ethiopia using annual time-series
data from 1990/91 to 2024/25. Due to the recent establishment of the Ethiopian Securities
Exchange (ESX) and limited historical capital market data, the study uses financial development
indicators as proxies for capital market development. Secondary data were obtained from the
National Bank of Ethiopia, the Ethiopian Statistical Service, and other relevant sources. The
analysis employed descriptive statistics, Augmented Dickey-Fuller (ADF) unit root tests,
Johansen cointegration analysis, and the Vector Error Correction Model (VECM) to examine
both short-run and long-run relationships among the variables. The findings reveal that inflation
has a significant negative effect on capital market development, indicating that macroeconomic
instability can hinder financial market growth and long-term investment. Interest rates show
mixed effects, reflecting their complex influence on savings, investment, and financial sector
development. The results also confirm the existence of a long-run relationship among the
variables, emphasizing the importance of a stable macroeconomic environment for capital
market growth. The study concludes that maintaining price stability and an efficient interest rate
environment can support the development of Ethiopia’s emerging capital market. Future studies
should reassess these relationships as more comprehensive capital market data become
available through the expansion of the Ethiopian Securities Exchange
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Keywords
: Capital market development, inflation, interest rates, ESX