Investment Expenditure Nexus Economic Growth in Ethiopia: Cointegration Approach

Abstract

The major objective of this study was to investigate the nexus between investment expenditure and economic growth in Ethiopia. The study adopted modified neoclassical growth framework using a data from NBE and WB data base from 1975-2018. All the variables were found non stationary at level and become stationary at first difference, so that Johansen’s co-integration test was conducted to check for long run relationship among variables in the model. Subsequently, all the variables confirmed co-integartion and VEC model was estimated to show both short run and long run relationships and finally Granger causality test was applied to recognize the direction of causation. The findings of the study revealed that investment expenditure have insignificant short run impact on growth, however significantly positive in long run. The result from causality exhibited bidirectional relationship. Besides, labor force, openness, exchange rates and liberalization dummy incorporated in the model were found positive and significant in the long run. Further, the coefficient of ECT was -0.4010 that shows any deviations from long run equilibrium is corrected at 40.10% annually and converges towards its long run steady state path. Based on the findings, it is recommended that a long run policy towards investment expenditure in home economy is whispered to deliver a significant effect on economic growth. Hence, increasing efficiency of investment sector would enable Ethiopia to sustain domestic economic growth in long run.

Keywords: Investment expenditure, Granger, Co-integration, Economic Growth, long run, Ethiopia.

DOI: 10.7176/JESD/11-11-04

Publication date:June 30th 2020