This study attempts to evaluate the inter-relationship among two macro
variables, namely private investment and GDP growth both in the long and
short run with reference to Ethiopian economy using a data set of 1970-2011. I
try to pinpoint the important determinants of each variable, using the standard
econometric techniques. Long run relationship between variables is specified
by using method proposed by Johansen and Juselious (1990).Based on the
results of the long-run co-integration tests parameters short correction model is
used to estimate the short run relationship between the variables. As expected,
growth has a strong positive relationship with public and private investment;
there is evidence of uni directional causality between real GDP, and private
investment. A general negative theoretical relationship between public and
private investment is confirmed in the context of Ethiopian economy, i.e.
public investment has a ―crowding-out‖ effect on private investment at large.
This is because public investment has primarily been financed in the past
through internal and external borrowing. The government revenues collected
through taxation has little contribution in promoting public investment.
Overall, the major policy implication of this study is that, given the long run
positive impact private investment and public investment on economic growth,
it will be natural to think of supplementary reforms
