The Dynamic Relationship between Financial Development and Economic Growth: Empirical Evidence from Ethiopia (original) (raw)
Related papers
2017
This paper investigates the dynamic causal linkage between bank-based financial development and economic growth in Ethiopia during the period from 1980 to 2014. The study includes savings and investment as intermittent variables in an attempt to address the omission of variable bias – thereby creating a multivariate Granger-causality model. Using the newly developed autoregressive distributed lag bounds testing approach to cointegration and the error-correction model-based causality model, the study finds that in the short run, both financial development and economic growth Granger-cause each other in Ethiopia. However, in the long run, there is unidirectional Granger-causality from bank-based financial development to economic growth. The study, therefore, recommends that policies aimed at enhancing both economic growth and financial development should be pursued in the short run. However, in the long run, policies that target the development of the banking sector should be prioriti...
Financial development and economic growth in Ethiopia: A dynamic causal linkage
RePEc: Research Papers in Economics, 2016
This paper investigates the dynamic causal linkage between bank-based financial development and economic growth in Ethiopia during the period from 1980 to 2014. The study includes savings and investment as intermittent variables in an attempt to address the omission of variable biasthereby creating a multivariate Granger-causality model. Using the newly developed autoregressive distributed lag bounds testing approach to cointegration and the error-correction model-based causality model, the study finds that in the short run, both financial development and economic growth Granger-cause each other in Ethiopia. However, in the long run, there is unidirectional Granger-causality from bank-based financial development to economic growth. The study, therefore, recommends that policies aimed at enhancing both economic growth and financial development should be pursued in the short run. However, in the long run, policies that target the development of the banking sector should be prioritised in order to ensure a sustained growth path.
Orginal article, 2019
This paper investigates linkage between financial development and economic growth in Ethiopia during the period from 1975 to 2016 using Autoregressive Distributed Lag (ARDL) approach. The paper also schedules Vector Error Correction Model (VECM) in order to observe how fast the cointegrated variables convergence in long-run. Accordingly, the results of bound test confirmed that the long run relationship between explanatory variables and economic growth. The empirical results implied evidence of a long-run and short run positive impact of financial development on economic growth in Ethiopia. This implies financial sector and financial institution the input to support and accelerate economic growth short and long run. With regard to other control variables, except inflation and government expenditure as percentage of GDP, all variables significantly influence economic growth in the long-run. Other than inflation, government expenditure and trade openness, human capital and gross investment were the pioneer determinant of economic growth in the short run. Furthermore, VECM granger causality tests show that the direction of causality is running from financial development to economic growth both in short run and long run. This study found the 'supply-leading' hypothesis held in the case of Ethiopia.
Effects of Financial Development on Economic Growth in Ethiopia: ARDL Bounds Approach
International Journal of All Research Education and Scientific Methods (IJARESM), 2021
Finance-growth nexus is one of the main issues in the major economies of the world.This study aimed at examining effects of financial development on economic growth in Ethiopia using annual time series data from 1980 to 2019. Stationary tests were conducted using the Augmented Dicker Fuller (ADF) test statistic. The Autoregressive Distributed Lag (ARDL) and Bounds test for co-integration was conducted. The Granger Causality technique was employed. The findings reveal that financial sector development causes economic growth. Inflation had a negative impact on economic growth in line with a priori expectation.Credit to private sector and savings had a positive impact on economic growth. It is recommended that monetary policy makers ensure all stakeholders adhere strictly to laid down goals to guarantee financial development. Government should implement policies that promote financial sector development which will result in investment and economic growth. Key Words: ADF, ARDL,Financial Development, Granger Causality, Time Series.
Financial development and economic growth: Additional evidence
Journal of Development Studies, 1999
Although the finance-growth relationship has been looked at in many African countries such as Ghana, the outcomes have been mixed while the causal direction between the two variables has particularly not been examined. This study, therefore, applied ARDL approach and Granger causality test to investigating the relationship and the causal direction between financial development and economic growth in Ghana during the period 1970-2013. The study revealed that the amount of credit from domestic sources to the private sector maintained a positively significant nexus with the growth of the economy whereas the domestic deposit was not the case. Also, the results established that there is a dependence of the Ghanaian economy to the changes in domestic credit to private sector whilst there exists a uni-directional causality running from the variations in economic growth to the domestic deposit in Ghana. Consistent with the findings, it is recommended that the authorities concentrate on improving the efficiency of the financial system to allow deposits to be channelled to growth-inducing investments to bring about the long-term growth of the economy.
Linkages Between Financial Market Development and Economic Growth in Ethiopia
Research Journal of Finance and Accounting, 2019
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.
Volume 16, Issue 1, January-March 2025 , 2025
This study examines the relationship between financial development and economic growth in seven countries of the Economic Community of West African States (ECOWAS) from 1970 to 2018. Vector autoregression and the Granger causality method were employed in this study to reveal the impact of financial development on investment, which is essential for long-term economic growth. In our study, investment, credit to the private sector, broad money, foreign direct investment, general government final expenditures, foreign trade, and savings are used as variables. The results of the analysis reveal that financial development indicators have a positive effect on investment. However, the degree of this effect differs from country to country. Credit to the private sector and broad money, which are indicators of financial development in some countries, have a low impact on investment, while in other countries, the impact is strong. Regarding Granger causality, four different results werefound across the countries:a bidirectional causality between financial development and investment, a unidirectional causal flow from investment to financial development, a unidirectional causal flow from financial development indicators to investment, and no causality between financial development and investment.
Examining the co-integrating relationship between financial development and economic growth
International Journal of Research in Business and Social Science (2147- 4478)
This study investigated the nexus between financial development and economic growth, exploring the short-run and long-run impact of financial development on economic growth in the Sothern African Development Community (SADC). The SADC was fragmented into middle-income countries and low-income countries so as to ascertain the income effect on the nature of the relationship, an exploration not considered by previous studies. The study used panel data covering the period 1980 to 2020. It employed the Autoregressive Distributed Lag (ARDL) Bounds and the Toda and Yamamoto and Dolado and Lütkepohl (TYDL) models to examine the relationship and the direction of causality respectively. In the short run, financial development, through domestic credit to the private sector, spurs economic growth and in the long run financial development focus should be on promoting bank deposits. Causality tests between economic growth and financial development tests showed mixed results depending on the varia...
Financial Development and Economic Growth: Additional Evidence from Ghana
Although the finance-growth relationship has been looked at in many African countries such as Ghana, the outcomes have been mixed while the causal direction between the two variables has particularly not been examined. This study, therefore, applied ARDL approach and Granger causality test to investigating the relationship and the causal direction between financial development and economic growth in Ghana during the period 1970-2013. The study revealed that the amount of credit from domestic sources to the private sector maintained a positively significant nexus with the growth of the economy whereas the domestic deposit was not the case. Also, the results established that there is a dependence of the Ghanaian economy to the changes in domestic credit to private sector whilst there exists a uni-directional causality running from the variations in economic growth to the domestic deposit in Gha-na. Consistent with the findings, it is recommended that the authorities concentrate on improving the efficiency of the financial system to allow deposits to be channelled to growth-inducing investments to bring about the long-term growth of the economy.
International Journal of Economics & Management Sciences, 2018
This paper aimed to investigate the linkage between financial development and sectoral output growth with special emphasis on Agriculture, industry and service sectors in Ethiopia during the period from 1975 to 2016. The study has used Autoregressive Distributive lag (ARDL) bound testing approach via an augmented growth model to examine the linkage between the financial development, proxy by bank credit to sectors, and sectoral output growth. Furthermore, Vector Error Correction Model (VECM) was employed to investigate the direction of causality between financial development and sectoral output growth. The results of bound test confirmed that the long run relationship between explanatory variables and sector output growth with less co integration of agricultural output growth and respective independent variables. The empirical results of this study showed, that in the long run financial development had a less significant positive impact on agricultural and service sector output growth but, short run relationship was found to be insignificant. However, financial development has a positive and significant impact on industrial and aggregate output growth both in the short run and long run. Furthermore, VECM granger causality tests show that there is no causality between financial development and agricultural output growth both in long run and short run. However, uni-directional causality running from (1) financial development to industrial output growth both in the long run and short run which confirmed supply leading growth hypothesis (2) financial development to service sector output growth in the long run (supply leading) and in the short run running from service sector to financial development which supports demand leading hypothesis only in short run.