An analysis of causal relationship between economic growth, exports, and imports in Ethiopia: Toda Yamamoto Approaches

Abstract

There has been economic growth associated with the increase in exports. Even though figures show a correlation between exports and economic growth in Ethiopia, they cannot guarantee that the export sector has been supporting the Ethiopian economy's double-digit growth rate. Therefore, the main objective of this study was to identify whether there is a short-run or longrun causal relationship between imports, exports, and economic growth. A multivariate Granger causal framework and time series data (1988–2021) were employed. The Johansen Cointegration test is used to determine the presence of a co-integrating vector in the variables. Accordingly, there is a long-run relationship between economic growth, exports, and imports. In the study, the Granger Causality and Toda Ymamoto tests revealed that there is a long run bidirectional causal relationship between imports and economic growth (GDP), as well as a unidirectional causal relationship between economic growth (GDP) and exports in the long-run. This indicates that exports and imports cause economic growth both individually and jointly, lending support to export or import growth. Individual granger economic growth causes imports in both directions. That means GDP granger causes imports, and import granger causes GDP. As a result, the researchers conclude that in Ethiopia, there is a dynamic relationship between imports, exports, and economic growth. To boost Ethiopia's economic growth and development, the government should develop export-led policies and ensure a higher level of exports.