The Link between Financial Development and Economic Growth in Ethiopia
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Date
2012-06
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Addis Ababa University
Abstract
The paper examines whether a long-run relationship between financial development and economic growth exist in Ethiopia. It employs Co-integrated Vector Autoregressive (CVAR) approach to asses how the financial sector contributes to growth. It further used the granger causality test so as to find the direction of causality between financial development and economic growth. Impulse response and variance decomposition tests are also applied so as to see the interaction between financial development and economic growth. The study utilized time-series data of Ethiopia over the period 1980-2010.
The findings support the existence of a uni-directional causality from economic growth to financial development. The emperical evidence, in addition, shows the presence of positive and significant long-run relationship between financial development and economic growth and an insignificant effect in the short-run. The results of Impulse response and variance decompositions also indicate the permanent effect of financial development on economic growth. The policy implication is that long-run policies of financial development are believed to provide significant effect on economic growth.
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Development and Economic