Exports domestic demand and economic growth in Ethiopia granger causality analysis

Abstract

Fundamental relationships between different macroeconomic variables may follow certain common theories but local preferences are also decisive in determining their behavior since, macro economy of every country is unique and they need to be treated after considering their peculiarities. In this regard, looking into domestic demand-growth nexus and export-growth nexus are, therefore, needed in order to understand the long -run economic stance and to capture the short-run dynamics in the national economy as well as to find evidence about the source of economic growth. However, the causal relationship between exports, domestic demand and economic growth in Ethiopia has not received adequate attention. Therefore, the aim of this study is to find a causal relationship between export, domestic demand and economic growth in Ethiopia using time series data over the period 1960/61-2010/11. This study uses two measures for domestic demand, namely household consumption and government consumption. Granger causality and Johansen cointegration test are employed in the empirical analysis. Result of Johansen cointegration test indicates the existence of long run relationship among the variables. The result of Granger causality test shows that there is a dynamic relationship between export and economic growth and between domestic demand and economic growth. Export and domestic demand are important for economic growth as well as, economic growth have an impact on export and domestic demand in Ethiopia. A successful and sustained economic growth requires growth in both export and domestic demand. Nevertheless, a balance emphasis should be to domestic demand to push the economy towards higher growth path.