The Relationship Between Financial Development And Economic Growth Evidence From The Ethiopian Economy

This paper examines the nexus between financial sector development and economic growth at a country level in Ethiopia from 1983-2019. The study utilized the autoregressive distributed lag (ARDL) model and Granger causality test to inspect the relationship and casual bond between finance and growth. The econometric analysis disclosed that the private sector credit, total insurance premium, government expenditure, gross fixed capital formation, and labor force have a positive and significant influence on the Ethiopian real GDP per capita in the long-run. On the contrary, broad money supply and interest rate spread negatively and significantly affect the Ethiopian real GDP per capita in the long-run. The Granger causality test analysis reveals that the causality direction runs from financial development proxies (private sector credit and interest rate spread) to economic growth. Furthermore, the study found evidence that supports the neutrality and demand following views when broad money supply and total insurance premium are used as indicators of financial development, respectively. The study recommends that priority should be given to policies that enhance the financial sector development.

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