TRANSMISSION CHANNELS OF FINANCIAL CRISES TO ETHIOPIAN ECONOMY

Abstract

Financial crises mean a sudden change in the financial stability in the country, a situation where some of the huge financial institutions suddenly lose a large part of their assets. The European financial crises have reached its global dimensions that are going beyond the geographical borders of Europe. It does not matter whether it is about the economy of the developed or developing countries. This study aims to analyze transmission channels of financial crisis to Ethiopia economy, with time series data of 1975 to 2015 using structural break test, Bayesian Vector-Autoregressive model applied in order to know the short run and long run effect of financial crises on Ethiopian economy. All necessary time series tests such as stationary test, co-integration test, causality test and other necessary test are done. And the result of the study reveals that only net transfer affected by the crises and external aid and external debt does not affect by the crisis but overall the economy does not affect by transmission channels of financial crises. In the long run net transfer and aid effect is high. On the other hand, external debt have a negative effect on the economy. Therefore, Ethiopia as a country should learn from the past event even if aid and debt not decline at the time of the crises. And also there should be efficient use of debt.