MONETARY POLICY AND PRIVATE INVESTMENT: AUTOREGRESSIVE DISTRIBUTED LAG APPROACH: EVIDENCE FROM ETHIOPIA

Abstract

Investment fueled by the private sector is a catalyst for achieving sustainable economic growth. This study examines the effect of monetary policy on private sector investment in Ethiopia. The time series data collected from National Bank of Ethiopia, Ethiopian Investment Commission and the World Bank covering the period of 1992-2022. Auto Regressive Distributed Lag and Error Correction Model employed for the time series analyses. The results revealed that private investment significantly affected by the monetary policy both in short-run and long-run. In the long-run, lending interest rate and broad money supply negatively and significantly affects the private investment whereas deposit interest rate, domestic credit to private sector, government domestic debt and trade openness positively and significantly influences private investment. In short-run, lending interest rate, broad money supply and trade openness positively and significantly affect private investment in Ethiopia. On the other hand, government domestic debt
and inflation negatively and significantly influences private investment in short-run dimension. The results show important policy implications for both regulatory authorities and the government. National Bank of Ethiopia suggested to formulate policy reform that can encourage private sector investment. It is essential for the government to create stable political and economic environment as well as favorable investment climate and hence, the private sector investment will boost and contributes more to supply side and high employment opportunities for this large portion of young generation in the country.