The Role Of Financial Intermediation In Economic Growth In Ethiopia

Abstract

This Study Investigates The Role Of Financial Intermediaries In Economic Growth Of Ethiopia For The Period (1971-2014) By Using VAR Model. The Methodologies Employed For This Study Were: Johansen Cointegration Test, Granger Causality, Vector Error Correction Model Test. The Broad Money Supply As A Share Of GDP Or Financial Sector Development Was Used As Proxy For Financial Intermediaries And Real GDP Growth For Economic Growth. Unit Root Tests Were Conducted By Employing ADF And PP Test. The Cointegration Test Was Portrayed, Long Run Relationship Between Variables. The Granger Causality Test Showed Unidirectional Causal Relationship Found From Financial Sector Development To Real GDP Growth. There Are Two Findings. The Regression Result Shows That, The Relation Between Financial Sector Development And Real GDP Growth Is Positive Both In The Short And Long Run . Therefore, Financial Sector Development Is A Significant Factor To Determine Real GDP Growth At 10% Critical Level In The Short Run And At 5% Critical Level In The Long Run. However, Gross Domestic Saving Is Not A Significant Factor To Determine Real GDP Growth In The Short Run But Gross Domestic Saving Is A Significant Factor To Determine Real GDP Growth In The Long Run. Similarly, Population Growth And Export Have A Positive Significant Effect On Real GDP Growth. By Contrast, Regime Structural Change Has Negative Significant Effect In The Long Run. Secondly, The Analysis Of Granger Causality Test Results Shows That, Unidirectional Causal Has Found From Financial Sector Development To Real GDP Growth. The Variance Decomposition Demonstrates That, Financial Sector Development Is The Most Important Source Of Shock To Real GDP. The Overall Policy Implication Of The Study Recommends That, The Finance -Led Growth Strategy Is Effective By Extensively Addressing Expansion Of Modern Financial Intermediaries, Infrastructure, Transport Related And Transaction Costs.