Abstract

Fundamental relationships between different macroeconomic variables may follow certain common theories, but local preferences are also decisive in determining their unique behaviour.  Looking into domestic demand-growth nexus and export-growth nexus is, therefore, needed in Ethiopia, so as to understand the long -run economic stance and to capture the short-run dynamics in the national economy. Thus, the aim of this study is to find a causal relationship between exports, domestic demand and economic growth in Ethiopia using time series data over the period 1960 to 2011. Household consumption and government consumption were used to measure domestic demand. Granger causality and Johansen cointegration tests were employed in the empirical analysis. Result of Johansen cointegration test indicates the existence of long run relationship among the variables and Granger causality test result shows a dynamic relationship between export and economic growth, and between domestic demand and economic growth. Exports and domestic demands are important for economic growth and economic growth has an impact on exports and domestic demand in Ethiopia. A successful and sustained economic growth requires growth in both exports and domestic demand. Nevertheless, a balance emphasis should be on domestic demand, particularly household consumption to push the economy towards higher growth path.  Key words: Domestic demand, Ethiopia, exports, Granger causality.

Highlights

  • Any development model starts with the key factors determining economic growth

  • The former focuses on external demand, while the latter highly stresses on the domestic demand as articulated by the Keynesian theory of demand in Keynes‟ General Theory (1930)

  • The study has investigated a causal relationship among domestic demand, export and economic growth in Ethiopia using annual time series data

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Summary

INTRODUCTION

Any development model starts with the key factors determining economic growth. In this regard, an admirable Keynesians macro economic theory suggests aggregate demand is the source of growth. The Johansen (1988) cointegration technique is used to test the long run relationship of exports, domestic demand and economic growth since the Johansen Maximum Likelihood technique has several advantages: Firstly, without imposing any bias on the estimates, it permits the existence of cointegration between series of variables. Chimobi and Uche (2010) examined the relationship between export, domestic demand and Economic growth in Nigeria using time series data over the period 19702005 They employed Granger causality and cointegration test. In order to examine the short-run dynamics and long-run relationships among domestic demand, export and economic growth, the study employs cointegration and Granger causality test in the VAR form as: U(VAR)=(Y,X,GC,HC). This finding is consistent with Dunne and Nikolaidou (1999) in the case of Greece (Loto, 2011) and Nigeria

A VAR model with an error correction mechanism
Findings
CONCLUSION AND POLICY IMPLICATIONS
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