Abstract
In this study we consider the link between financial development and economic growth from 1971 to 2009 in Ethiopia. Most theoretical and empirical works in the literature suggest that deeper financial market promotes economic growth. We take this hypothesis to the test of conducting descriptive and empirical study using Ethiopia’s data. In the empirical analysis we estimate an investment equation applying the Stock Watson Dynamic OLS procedure. The result suggests that the financial development indicator positively and significantly explains investment suggesting that financial development and economic growth have direct and strong relationship. The argument that financial development and economic growth have positive linkages is supported by results of both descriptive and empirical analysis. But the argument that financial development determines economic growth appears to be inconclusive. The Granger causality test result suggests bidirectional influence between financial development and economic growth. Keywords : Financial,Market,Development,Growth DOI : 10.7176/JEP/10-22-01 Publication date : August 31 st 2019
Highlights
Despite a wide controversy as to how financial markets contribute to economic growth, there seems consensus on the roles financial markets play in promoting economic growth
This paper aims at elucidating the linkage between financial development and economic growth as well as testing their causality in the case of Ethiopia
While Ethiopia‟s financial sector has not been studded to any great extent, this study is believed to narrow the gap in the literature
Summary
Economic Performance Rebounding from the 2002/03 drought, there has been strong economic growth in Ethiopia over the past seven years. Depicts growth rates by economic activities namely agriculture, industry and service sectors. It shows that the growth in the service sector was very strong. In a bid to restore macroeconomic balance, the government has been pursuing strong policy measures This includes among others, pursuing tighter monetary and fiscal policy stance, elimination of domestic fuel price subsidy, rationing foreign exchange to importers and significant and stepped exchange rate adjustments. Financial sector development As part of the broader market oriented economic policy agenda, implementation of the financial sector reform begun in the early 1990s. The banking system comprises the National Bank of Ethiopia (central bank), 15 commercial banks (2 stateowned and 13 private), and 1 specialized state-owned bank These banks currently have 673 branch networks all over the country. Assets of the banking sector increased from Birr 20 billion at June 1996 to Birr62.5 billion at June 2009
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