This study has tried to assess the practical implications of financial marketrndevelopment and liberalization on macroeconomic variables like saving,rninvestment, inflation and Economic growth in Ethiopia, using a time series datarncovering the period 1974/75 -2003/04. The Johansen Maximum likelihoodrnestimation procedure has been employed to see the short and long-run dynamicsrnof selected financial variables and major macroeconomic variables.rnTo test the Mckinnon-Shaw hypothesis that removal of repressive policies andrndevelopment of financial markets can enhance saving, investment and ultimatelyrngrowth; the life-cycle saving model, the flexible accelerator model, Fry's inflationrnand Growth model were used as theoretical foundations.rnThe result indicated that saving is positively and significantly affected by the realrndeposit rate of interest and income growth. Domestic investment has a positivernlong-run equilibrium. relationship with output growth whereas the realrndepreciation of the exchange rate and an increasing level of government debt onrndomestic financial system were found to affect investment negatively. Inflationrnwas found to be non-responsive to the growth in per capita stock of money supplyrnand income, reflecting the structural rigidity of the economy.rnFinally, liquid liabilities of the financial system showed a significant and positivernrelationship with growth in per capita income whereas variables which proxyrnprivate sector credit growth were found to be insignificant in both the saving andrngrowth junctions.rnNevertheless, this study has certain limitations, i.e. it doesn't consider therninformal and semi-formal financial markets in the analysis due to in availability ofrnorganized data.