| Abstract: | In economic theory when high savings istied with high levels of capital formation
long-term economic growth can be realized. This study aims to investigate the
determinants of Capital Formation in Ethiopia using annual time series data
from1980/81-2015/16. To analyze data Error correction model was applied. The
result of co-integration test indicated that there is a long run relationship among
variables and error correction model used to estimate the short run dynamics. The
result of the models revealed grossnational saving, Per Capita Income, Investment,
and Consumption have significant role on gross Capital formation in Ethiopia in the
long run. ButConsumer Price Index, Average Lending, Dependency Ratio, Real
Effective Exchange Rate, Taxes and Money Supply, found to be statistically
insignificant determinants of gross Capital formation in Ethiopia in the long run.
However, in the short run, except Consumer Price Index, DependencyRatio, Real
Effective Exchange Rate, Taxes and Money Supply the rest of the explanatory
variables such as Gross National Saving, Per Capita Income, Average lending rate,
Investment, and Consumption found statistically significant explaining gross Capital
formation in Ethiopia. Further, the findings of the study underlined gross
nationalsaving; Per Capita Income and Investment, and Consumption are most
important factors that positively and significantly influence gross capital formation
in Ethiopia. Therefore, In order to acquire maximum benefit from them concerned
bodies have to put their effort to sustain the saving culture through financial
literacy. The public authorities should Encourage savings by enhancing Interest rate
.The Government should be creating and enabling good atmosphere and provide
more infrastructural facilities to cover way for investment which in turn will boost
Capital Formation. |
