The Long-Run Impact of Bank Credit on Economic Growth in Ethiopia: Evidence from the Johansen’s Multivariate Cointegration Approach

Abstract

In this paper the long-run impact of bank credit on economic growth in Ethiopia is examined via a multivariate Johansen cointegration approach using time series data for the period 1971/72-2010/11. More importantly, the transmission mechanism through which bank credit to the private sector affects long-run growth is investigated. The results supported a positive and statistically significant equilibrium relationship between bank credit and economic growth in Ethiopia. Deposit liabilities also affect long-run economic growth positively and significantly through banks services of resource mobilization. Moreover, the effect of control variables such as human capital, domestic capital, and openness to trade on growth are found to be positive and statistically significant while inflation and government spending have statistically significant negative impact on economic growth in the long-run. A major finding is that bank credit to the private sector affects economic growth through its role in efficient allocation of resources and domestic capital accumulation. Thus, the result imply that policy makers should focus attention on long-run policies to promote economic growth - the creation of modern banking sector so as to enhance domestic investment, which is instrumental to increasing output per capita and hence promoting economic growth in the long-run .

Key words: Bank Credit, Cointegration, Economic Growth, Ethiopia, Long-run.