Abstract:
Macroeconomic instability can affect capital formation and economic uncertainty through creating uncertainty on current and future macroeconomic environment. Uncertainty may increase capital flight and this lowers capital accumulation and hence economic growth. The overall objective of this study was to examine the impact of macroeconomic instability on Private capital accumulation and economic growth. For the purpose of analyzing the impact of macroeconomic instability on private capital accumulation and economic growth in Ethiopia, secondary data source from 1974/75 to 2017/2018, was used. The major data sources for the problem under investigation was publications of National Bank of Ethiopia (NBE), Ministry of Finance and Economic Corporation (MOFEC), Ethiopian investment commission (EIC), Ethiopian revenue and custom authority and Central statistics Authority (CSA) of Ethiopia. In this study the impact of macroeconomic instability estimated by using VAR model, endogenous growth model and the accelerator model. In addition macroeconomic instability index has been calculated by using UNDP method of calculating human development index (HDI). The result of the model indicated that there is a long run relationship among the variables entered in both models. Both the long run and short run result shows that, macroeconomic instability has a detrimental effect on both economic growth and private capital accumulation. Based on the finding, the major policy implication of this study is that, poor management of macroeconomic with the adoption of incorrect and illogical fiscal and monetary policies and passive reaction against shocks will intensify the macroeconomic instability. Moreover, budget deficit is one component of macroeconomic instability, the government can reduce budget deficit and stabilize the economy through reducing unproductive expenditures like defence expenditure. Saving has positive impact on private capital accumulation, policies which is used by the government to mobilize saving is the best for rapid private capital accumulation and hence economic growth
