The Link Between Financial Development And Economic Growth In Ethiopia

The Link Between Financial Development and Economic Growth in EthiopiarnRoman TesfayernAddis Ababa University, 2012rnThe paper examines whether a long-run relationship between financial development andrneconomic growth exist in Ethiopia, It employs Co-integrated Vector Autoregressivern(CV AR) approach to asses how the financial sector contributes to growth, It further usedrnthe granger causality test so as to find the direction of causal ity between financialrndevelopment and economic growth, Impulse response and variance decomposition testsrnare also applied so as to see the interaction between financial development and economicrngrowth, The study utilized time-series data of Ethiopia over the period 1980-2010,rnThe findings support the existence ofa uni-directional causality from economic growth tornfinancial development. The emperical evidence, in addition, shows the presence ofrnpositive and significant long-run relationship between financial development andrneconomic growth and an insignificant effect in the short-run, The results of Impulsernresponse and variance decompositions also indicate the permanent effect of financialrndevelopment on economic growth, The policy implication is that long-run policies ofrnfinancial development are believed to provide significant effect on economic growth

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