The importance of financial development for economic growth and macroeconomic stability has become inconclusive in empirical studies, and country-specific studies have been scant to understand the finance-growth relationship. Therefore, this study focused on the long-run impact of financial development on economic growth and macroeconomic stability in Ethiopia. The result showed a long-run relationship between financial development and economic growth and macroeconomic volatility. The study found that financial development non-linearly affects economic growth. After a certain level of optimal development, finance reduces real GDP per capita. However, the strength of the impact depends on the type of indicator we use. Similarly, financial development helps to reduce macroeconomic instability. Therefore, the government should pay attention to the choice of indicators and the optimal level of development in the financial system.
- Financial Development