The Effect of Monetary Policy on the Private Sector Investment in Ethiopia: ARDL Co-Integration Approach
Economics
Volume 4, Issue 2, April 2015, Pages: 22-33
Received: Mar. 9, 2015; Accepted: Mar. 20, 2015; Published: Mar. 26, 2015
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Authors
Demilie Basha Hailu, Department of economics, Adigrat University, Adigrat, Ethiopia
Fikru Debele, Department of economics, Arbamincth University, Arbamincth, Ethiopia
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Abstract
Even though there is a belief that monetary policy can influence private sector investment, research works have not yet been conducted on the dynamic impact of monetary policy on private investment in Ethiopia. Rather, literatures are substantially deal with the determinants of private investment and the effectiveness of monetary policy in Ethiopia separately. Consequently, a times series analysis technique using annual data for the period 1975-2011 is utilized to investigate the power of policy makers in enhancing the performance of private investment through monetary policy changes. Moreover, the ambiguous results in relation with the power of monetary policy in affecting private sector investment in elsewhere including sub-Saharan countries become an initiation to undertake this particular study. Accordingly, this study seeks to present an empirical assessment of monetary policy that has either stimulated or dampened private sector investment for the past several decades. Employing time series econometric techniques such as, co-integration and error correction techniques within an ARDL framework the study reveals intriguing results. Results suggest that private investment is positively and significantly influenced in the short-run by public investment, money supply, and a real output but negatively and significantly by real exchange rate while, real interest rate is found to have insignificant and has a negative sign in line with macro-economic theory. Moreover, in the long run, the result shows a positive and significant effect of public investment, real GDP and broad money supply while real exchange rate negatively and significantly influenced private investment. However, real interest rate is found to have a positive but insignificant effect in the long run as well. The conclusion is that monetary policy measures are more influential than fiscal policy in promoting private investment in Ethiopia via improving financial resource availability for investment.
Keywords
Monetary Policy, ARDL Co-Integration, Private Investment, Ethiopia
To cite this article
Demilie Basha Hailu, Fikru Debele, The Effect of Monetary Policy on the Private Sector Investment in Ethiopia: ARDL Co-Integration Approach, Economics. Vol. 4, No. 2, 2015, pp. 22-33. doi: 10.11648/j.eco.20150402.12
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