Abstract:
Small and Medium Enterprise is the condition in which developing countries move into a pattern
of substantially stronger growth which play a pivotal role in industrial development and
restructuring, satisfying rising local demand for services, allowing for increased specialization
and supporting larger firms with inputs and services. The aim of this study is to fit a time series
model for Small and Medium Enterprise in Ethiopia and its effect on economic growth. The data
used are the quarterly Time Series data in the year 2000-2021 on the variables of Small and
Medium Enterprise, Consumer price index, Import, Export, and Exchange Rate. From the
descriptive results, SMEG has small CV among all included variables which indicate that, there
was small variation in SMEG from one year to the other year in the given period of time. On the
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other hand, IMPORT and EXPORT, has high CV this implies that EXPORT and IMPORT has
high variation which fluctuate from year to year. Johansen co-integration test suggests that there
was one co-integration vector, which confirms to use vector error correction model. From the
VEC model, SMEG was extremely influenced by Consumer Price Index and Exchange Rate in
both Short-run and Long-run. Similarly, both Import and Export were also influenced by
Consumer Price Index and Exchange Rate in both short and long run. According to the result of
Variance decomposition, the results of the decomposition variance, more of the variation of all
variables were explained by their own effect in short-run and becomes decrease in long-run. The
influence of SMEG on their effect was decreases while we move further to the long run.
