Impact of selected macroeconomic variables on economic growth in Ethiopia: A time series analysis

Abstract

Our study examines the conventional wisdom that causality runs from selected macroeconomic variables to economic growth in Ethiopia. Time series data from 1975 to 2018 were used to determining short and long run relationship among variables. A Johansen’s Cointegration test was used to investigate the presence of long run equilibrium relationship between variables while the Vector Error Correction Model and Granger Causality were used to test the short and long run causality direction between variables. The data were derived from the National Bank of Ethiopia (2020) and World Bank report (2020). Findings reveal that domestic savings, capital formation, exchange rate and price inflation have a positive and significant impact on long-run growth, although they have an insignificant impact in the short run. The result of causality generated a bidirectional association running from trade openness and domestic saving to growth. Unidirectional causality is exhibited between the rest of the variables and economic growth. The estimated coefficient of error correction term was found -0.3751, showing that any deviations from long run equilibrium are corrected are at 37.51% annually and converge towards its long run steady state path. This indicates a signal that long run policy towards inspire selected macro variables has a significant impact on growth.