Volume 4, Issue 2, April 2015, Page: 22-33
The Effect of Monetary Policy on the Private Sector Investment in Ethiopia: ARDL Co-Integration Approach
Demilie Basha Hailu, Department of economics, Adigrat University, Adigrat, Ethiopia
Fikru Debele, Department of economics, Arbamincth University, Arbamincth, Ethiopia
Received: Mar. 9, 2015;       Accepted: Mar. 20, 2015;       Published: Mar. 26, 2015
DOI: 10.11648/j.eco.20150402.12      View  6973      Downloads  665
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.
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
Abebe A. (2008), Excess Liquidity and Effectiveness of Monetary Policy: Evidence from sub-Saharan Africa, IMF, WP /06/115.
Acosta P.(2000), short and long run determinants of private investment in Argentina, journal of applied economics, vol.8, no.2
Alatiqi S, (2008) “can money supply predict stock prices?”journal for economic educators, vol.8, no.2
Alexander D. (2011), the long run relation between monetary policy and private investment in Nigeria, research journal of finance and accounting, Nigeria.
Alexiadis S. and Daniel F. (2012), the flexible accelerator model and the regionalization of capital stock, regional science inquiry journal, vol.4, Attens, Greece
AM Sisay, (2007),Determinants of Private Investment in Ethiopia: A Time Series Study American Economic Association
Angeloni, I.(2003), Monetary Policy Transmission in the Euro Area, Cambridge University Press
Asante Y. (2000), Determinants of privateinvestment behavior, AERC Research Paper, African Economic Research Consortium, Nairobi. Kenya.
Asante, Y.,(2012), Government Policy and Private Investment in Developing Countries, IMF working papers, vol,6,no.2
Asrat S. (2012), “does the Ethiopian economy take after Asian growth?” a working paper.
Axilrod, H. (1997), ‘Transformation to Open Market Operations;’ Developing Economies and Emerging Markets, Economic issues, IMF, Washington
Ayemere I.(2010) monetary policy and investment in Nigeria.
Bajide N. (2011), “Capital Controls and Monetary Policy in Developing Countries”, IMF working papers
Booth, A. (1999). Initial Conditions and Miraculous Growth: Why is South East Asia Different from Taiwan and South Korea? World Development, Vol. 27, No. 2.
Bruno M. (2001), an econometric analysis of private sector investment in Brazil, department of economics, university of Brasilia, a journal on cepal review,
Chibber, A. and D. Mansoor (2001),“Fiscal policy and private investment in developing countries”. RechercheEconomique, XLIV
Chichi A. (2009), The Impact of Monetary Policy on Micro-Economy and Private Investment in Nigeria, Research Journal of Finance and Accounting,Vol 1, No 3.
Chichi A. (2011) Long Run Relationship between Private Investment and Monetary Policy in Nigeria, Journal of Finance and AccountingVol 2, No 6
Daniel Z. (2008), 'Determinants of private investment in Ethiopia’. Economic Review, American Economic Association Economics,
Davison W. (2012), “Ethiopian central bank looser monetary policy to boost lending”, Annual report
Dickinson D. (2005), the real effect of monetary policy in china, an empirical analysis, china economic review
Ezie O. (2012), an empirical analysis of monetary policy and private sectored investment in Nigeria, department of economics, Bingham University, KaruNasarawa state, Faculty of Social Sciences, University of Cape Coast
Fikru D. (2007), the analysis of behavior of private investment in response to fiscal policy changes in sub-Saharan Africa, Addis Ababa University, Ethiopia
Genevesi O. (1997), A Statistical Analysis of Foreign Exchange Rate Behaviour in Nigeria’s Auction
Getinet,A.(2005), ‘Determinants of Foreign Direct Investment in Ethiopia:’ A time-series analysis, Paper prepared for the 4th International Conference on the Ethiopian Economy.
Godwin c. (2010), government expenditure, money supply, prices and output relationship in Nigeria: an econometric analysis, International research journal of finance and economics, Euro journals publishing, Inc, Issue 54.
Greene, J., (2000), Private investment in developing countries: an empirical analysis. IMF Staff Papers, 38 (1)
Hall R. and hitch (1989) price theory and business bevior, oxford economic papers
Handa J. (2009), “Monetary Economics”, 2nd Edition, McGill University, Canada.
Imtiaz A. (2012) dynamic modeling of private investment in agricultural sector of Pakistan
J.Manuel (1998) Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison
John J. (2010), “how falling exchange rates 2000-2007 have affected the U.S. economy and trade deficit”, New York, USA.
Karagoz K. (2010), determining factors of private investment, an empirical analysis for turkey.
Khan M., (1999), “Private Investment and Economic Growth in developing Countries” IMF Staff Papers
Khan, (2010), Crowding Out Effect of Public Borrowing: A Case of Pakistan, TheIslamia University of Bahawalpur, Pakistan, MPRAPaper.
Liang F. and Huang W. (2011), the relationship between money supply and the GDP of USA, Maganga A. (2012), selected macro economic variables affecting private investment in Malawi, Munich personal RPEC archive (MPRA).
Maganga A. (2012), selected macro economic variables affecting private investment inMalawi, Munich personal RPEC archive (MPRA).
Madsen J. (2002), The Causality Between Investment and Economic Growth, Economics Letters
Magnus J. (2010), The Determinants of Private Sector Investment in Ghana: An ARDL Approach, European journal of social sciences, vol.15, no.2, Accra, Ghana.
McCallum B. (1999), “targets versus instrument rules for monetary policy’, federal reserve bank of st. Louis reviews.
McKinnon, R.I. (1998), ‘Money and Capital in Economic Development’, Washington DC: The Brookings Institution.
Michelle c. (2002), investment in uncertain world, Zagreb international review of economics and business, vol.5, n0.1, Croatia
Misati R.(2010), liberalization, stock market development and investment efficiency in Africa, The African Economic and Business Review, Vol. 3, No. 1
Mongbay, (2010), “Ethiopian banking and monetary policy’, country specific
Nayaran, P.K., (2004), “The saving and investment nexus for China: evidence from cointegration tests”, Applied Economics, Vol. 37.
National bank of Ethiopia (2009), NBE’s monetary policy frame work, Addis Ababa, Ethiopia
Nouri M.(2011), The Impact of Monetary Policy on Economic Growth in Iran, Middle East journal of scientific research 9(6), Babolsar, Iran
Olweny ,(2007), Macroeconomic Development and Private Sector Performance in Ethiopia: The 1990’s Experience, working papers
Olweny T. (2012),the effect of monetary policy on private sector investment in Kenya, journal of applied finance and banking,vol.2.no.2, international scientific press, Kenya.
Ouattara B. (2010), Modeling the Long Run Determinants of Private Investment in Senegal, school of economic studies, university of Manchester.
Pesaran M.H and R.J. Smith (2001), “bound testing approaches to analysis of long run relationship”, journal of applied econometrics
Rufus A. (2008), optimizing macroeconomic investment decisions; a lesson from Nigeria, European Journal of Scientific Research, ISSN 1450-216X Vol.22 No.4
Sengonzi F. (2009) the relative efficiency effectiveness of fiscal and monetary policy in macroeconomic management
Shaw, E. (1998), Financial Deepening in Economic Development,: Oxford University Press
T.K. Jayaraman, (2008), Monetary Policy Transmission Mechanism in Fiji: An Empirical Analysis of The Quarterly Model, international journal of business and management, vol.3, no.11
TadesseA. AndTekie A. (2012), Adjustment and the effectiveness of monetary policy in Ethiopia
Tarek H. (2005) The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries, Bank of Canada Working Paper
William R.(2004), ‘monetary policy actions and the incentive to invest”, working paper series.
Wilson, E.J. (2000). Savings, Investment, Productivity and Economic Growth of Australia 1861- 1990: Some Explorations. The Economic Record.
Browse journals by subject