The Effect Of Financial Development On Economic Growth Of Ethiopia

Abstract

For a long period of time, most African economies have embarked on financial sector reforms. However, the empirical implications of these reforms have been differ from each other. The Ethiopian financial system incorporates formal, semiformal and informal institutions. This study examined the impact of financial development on Ethiopian Economic growth by using time series data in Ethiopia over the period 1985–2023.This investigation was used four common indicators of financial development (exchange rate, inflation rate, broad money and trade openness). The study used an explanatory research that used quantitative research approach and The study used the Auto Regressive Distributive Lag (ARDL) technique of estimation, to know the long run and short run relationship between variables. it was discovered that there exist a long-run positive relationship between broad money, trade openness and exchange rate and economic growth, a long run negative relationship between inflation rate and economic growth. However, in the short run, exchange rate, trade openness and broad money show a negative and significant impact on economic growth, and the short run effect of inflation rate is positive and significant on economic growth. The short-run error correction estimation reveals a significant speed of adjustment coefficient. Therefore, this study confirms the existence of a positive, negative and long-term impact of all the indicators of financial development on economic growth through bound test. The study also checks for different diagnostic tests like serial correlation, heteroscedasticity, normality test, model specification and model stability test. The main policy recommendation therefore is that sufficient consideration and proper recognition such as provision of suitable financial reforms should be given to the financial sector in Ethiopia as a determinant of economic growth. Therefore, the study proposed that sufficient consideration and proper recognition such as provision of suitable financial reforms should be given to the financial sector in Ethiopia as a determinant of economic growth