Impact of Financial Integration on Ethiopian Economic Growth

Abstract

This paper analyzes theoretically the role of financial integration on economic growth and empirically examines the influence of financial integration on Ethiopian economic growth. Many researchers find different investigation results during their data analysis on the impact of financial integration on economic growth. The outcome of most researchers indicate that financial integration has a positive contribution to economic growth, while the result of quite a few numbers of researchers suggested that financial integration has a negative influence on economic growth. Similarly, few of them propose that the relationship between these two variables as bi- directional. Furthermore, literatures categorize the impact of financial sector on economic growth into four basic hypotheses. Which are supply leading, demand following, bidirectional, and independent hypothesis. These hypotheses suggest that financial integration has different role on economic growth and all of them are supported by several research results of various researchers. It is considered that the main reason behind these contrasting research results are the level of financial integration and the composition of financial flows. Moreover, the financial crises that occur in recent decades created a heated debate among researchers on the advantages and disadvantages of financial integration. However, most economists agree that financial integration is beneficial to the economy. The result of this paper analysis also shows, financial integration has a positive impact on the Ethiopian economic performance.