Exploring the Linkages between Financial Development, Savings, and Economic Growth in Ethiopia: An Empirical Evidence-Based Analysis

Anulo, Olkamo, Degefe

MPRA Paper from University Library of Munich, Germany

Abstract: Ethiopia has experienced substantial growth in per capita income, domestic savings, and financial sector developments over the past four decades. This paper aims to examine the causal relationship between certain variables in Ethiopia from 1981 to 2023. The variables considered in this paper include per capita income, private sector credit, domestic savings, and the rate of change in the consumer price index. Per capita income and private sector credit are used as proxies to measure real economic growth and financial sector development, while the inflation rate plays a crucial role in controlling these variables. The study used the bounds cointegration test within the Autoregressive Distributive Lag (ARDL) model framework to investigate the existence of long-run integration among series. The ADF unit root test was employed to determine whether variables remained stationary. In this paper, the Granger causality test based on the vector error correction model is deployed to determine the causal influences and to identify supportive hypotheses for the Ethiopian economy. The findings affirm the existence of bidirectional causal relationships among the variables. Thus, the Ethiopian economy adheres to a feedback or bidirectional hypothesis, which suggests that an expansion of real economic growth will favour efficient financial development and stimulate savings. Similarly, having a well-functional financial sector development and steadfast domestic resources plays a crucial role in promoting economic growth. The study also recommends that the monetary authority should promptly encourage the development of a market-based financial system that is compatible with the development of bank-based systems.

Keywords: Supply-leading and Demand-following Hypotheses; Granger Causality Approach; VECM; Private Sector Credit; real Per capita Income and Domestic Savings (search for similar items in EconPapers)
JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2024-02-15, Revised 2024-02-08
New Economics Papers: this item is included in nep-ban
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