TRADE OPENNESS NEXUS ECONOMIC GROWTH IN ETHIOPIA: TIME SERIES ANALYSIS

Abstract

This study purposed to determine the granger causality and the long run and short run relationship between trade openness and economic growth in Ethiopia covering the period between 1992 and 2017. It incorporates foreign direct investment and exchange rates as the additional variables. To test for stationarity of the data, the augments Dickey-Fuller (ADF) were used. The Autoregressive distributed lag (ARDL) model was employed in this study to examine the long run relationship between the variables. The findings of the study suggestd the existence of positive and significant impact of trade openness on economic growth in Ethiopia in the long run; its short run growth impact is estimated to be insignificant. Moreover, the impact of real effective exchange rate and foreign direct investment variables were found to be positive and highly significant in the long run. The granger causality result reveals that trade openness, foreign direct investment and real exchange rate granger causes gross domestic product. It also indicates the existence of bi directional causality between gross domestic product and foreign direct investment. Therefore, there is a need to design and implement any policy action that could help improve the magnitude of the country’s exposure to international trade integration.