Abstract:
This study examined the relationship between institutional quality and economic growth in
Ethiopia over the period from 1985 to 2020. For this purpose ARDL and NARDL models and
Granger-causality test is employed on a data collected on the variables under study. The result of
ARDL model indicated that governance quality has a statistically significant negative effect on the
country’s economic growth in both short-run and long-run. In addition, political freedom has a
statistically significant negative effect on economic growth in the short run while, its effect is
positive in the long-run. The NARDL result revealed that in both short-run and long-run the
positive and negative shocks on institutional quality have no equal effect on economic growth.
Furthermore, in the long-run positive component of governance quality has greater negative
impact than the negative component while in short-run the positive shock has insignificant impact.
Similarly, in both short-run and long-run the negative component of political freedom has
insignificant impact but positive shock has significant positive and negative impact in the long-
run and short-run respectively. The study also found that there is threshold of 4.90 and 5.27 point
for governance quality in the long-run and short-run respectively, and for political freedom 3.21
point in the short-run. If the governance quality and political freedom exceeds the threshold, it
causes the positive effect on the growth. The Granger-causality test result revealed that there is a
bi-directional causality between political freedom and economic growth and unidirectional
causality running from positive and negative components of political freedom and governance
quality to economic growth. It is recommended that a threshold level of governance quality and
political freedom should be met for it to stimulate economic growth of our country.
