The Link Between Financial Development And Economic Growth In Ethiopia: Time Series Analysis

Abstract

Currently, the Ethiopian Government is having the objective of expanding financial market including Capital market due to a number of advantages financial development in different aspects. Therefore, the general objective of this study is to analyze the Link between financial development and Economic Growth in Ethiopia by using time series analysis. The secondary data were gathered from National Bank of Ethiopia and Other commercial banks for the time span of 1994-2024. After testing for order of stationarity, Vector Error Correction Model (VECM) was used to analyze both short-run and long-run relationship among variables. The result of the study reveals that there is both dynamic short-run and long-run relationship between variables included in the study, especially proxy of financial development as banks liquidity ratio and ratio of credit to private investment and economic growth. There is positive relationship between financial development and economic growth in Ethiopia. There is also causality between financial development and economic growth. Based on the result of the study, it is recommended that government and financial institutions should focus on proceeding financial activities so as to bring desired economic growth in Ethiopia