Macroeconomic Determinants Of Private Investment In Ethiopia: Time Series Analysis

Abstract

The main objective of this study is to empirically examine the macroeconomic determinants of Private investment in Ethiopia for the period ranging from 1974 - 2014 using the Vector Autoregressive (VAR) of multivariate time series analysis. The result shows that real GDP, interest rate, Government or public investment and real effective Exchange rate as well as inflation are the long run determinants of private investment in Ethiopia for the period under Consideration. Moreover, Real GDP and Real interest rate have significant positive effect on private investment However, Government or Public investment, real effective exchange rate and inflation rate influencing private investment negatively and significantly. In addition, in the short run only Government or Public investment, real effective exchange rate and inflation rate at their difference are statistically significant in determining private investment and has negative sign. Whereas, Real GDP and interest rate have positive effect on private investment of Ethiopia in the short run. The policy implication resulting from the study include, promoting political stability, attracting FDI, enabling a structured public- private dialogue, establishing a well-developed financial sector and promoting government investment in infrastructure development among others.