An Investigation of Macroeconomic Determinants of Private Investment in Ethiopia: Co-Integrated VAR Approach

Abstract

This study was conducted with the main objective of investigating and analyzing the macroeconomic determinants of private investment in Ethiopia over the period from 1974/75-2013/14.Both augmented dickey fuller and Philips Pearson test were employed to test the Stationarity of the variables. The study employed error Correction model to estimate the long run relationship of the variables. The regression results shows that real physical infrastructure investment, real social infrastructure investment , trade openness and bank credit have significant positive long run effect on private investment growth , where as inflation as it was measured by consumer price index has  significant negative short run and long-run effect. Economic growths have significant positive impact on the real private investment both in the short run and long run. The result of the regression suggests the crowding in effect of the real physical infrastructure investment and real social infrastructure investment on real private investment in Ethiopia in the long run whereas crowding out effect for short run. Moreover, the result of the regression confirm the validity of accelerator model which states investment is the linear proportion of output in the context of Ethiopia. Thus require the need to extend the growth of national output to raise the growth of private investment. Hence, as policy implication the study recommends government provision of fertile macroeconomic and investment climate. Moreover, investment in physical and social infrastructure in line with other supplementary reforms should be extended to promote the growth of private investment and economic growth at large.

Keywords: private investment, vector error correction model, economic growth,