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The Financial Development, Savings and Economic Growth Nexus Empirical Evidence from Ethiopia

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  • Anulo, Olkamo, Degefe

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. This paper used the Granger causality test to determine causal influences in the Ethiopian economy. The vector error correction model was employed for this purpose. The study also aimed to identify hypotheses that support these causal influences. The findings affirm the existence of bidirectional causal relationships among the variables. Thus, the Ethiopian economy adheres to a feedback 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.

Suggested Citation

  • Anulo, Olkamo, Degefe, 2024. "The Financial Development, Savings and Economic Growth Nexus Empirical Evidence from Ethiopia," MPRA Paper 120066, University Library of Munich, Germany, revised 08 Feb 2024.
  • Handle: RePEc:pra:mprapa:120066
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    References listed on IDEAS

    as
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    5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Testing hypotheses; domestic savings; private sector credit; and Real economy growth;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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