This study has tried to assess the practical implications of financial market development and liberalization on macroeconomic variables like saving, investment, inflation and Economic growth in Ethiopia, using a time series data covering the period 1974/75 – 2003/04. The Johansen Maximum likelihood estimation procedure has been employed to see the short and long-run dynamics of selected financial variables and major macroeconomic variables.
To test the Mckinnon-Shaw hypothesis that removal of repressive policies and development of financial markets can enhance saving, investment and ultimately growth; the life-cycle saving model, the flexible accelerator model, Fry’s inflation and Growth model were used as theoretical foundations.
The result indicated that saving is positively and significantly affected by the real deposit rate of interest and income growth. Domestic investment has a positive long-run equilibrium relationship with output growth whereas the real depreciation of the exchange rate and an increasing level of government debt on domestic financial system were found to affect investment negatively. Inflation was found to be non-responsive to the growth in per capita stock of money supply and income, reflecting the structural rigidity of the economy.
Finally, liquid liabilities of the financial system showed a significant and positive relationship with growth in per capita income whereas variables which proxy private sector credit growth were found to be insignificant in both the saving and growth functions.
Nevertheless, this study has certain limitations, i.e. it doesn’t consider the informal and semi-formal financial markets in the analysis due to inavailability of organized data
Corporate Author: Getnet Alemu and Edilegnaw Wale (Editor) & Ethiopian Economic Association/Ethiopian Economic Policy Research Institute
Publisher: Ethiopian Economic Association (EEA)
Primary Descriptors: liberalization
Secondary Descriptor: financial market
Geographic Descriptors: Ethiopia
Cataloge Date: 02/27/2013
Broad Subject heading: Macroeconomic
Call Number: 330.963 PRO 2009
Serial Key Title: Proceedings of the Fifth International Conference on the Ethiopian Economy
Publication catagory: International Conference
Content type: EEA Publication
Publication date: 2013-12-27 23:09:00
Forum or Discussion date: 2013-02-27 15:02:12
Place of publication: Addis Ababa, Ethiopia
Type of material: Book
Current frequency: Annualy
Author: Menelik Solomon