The Long run Relationship between Savings and Investment in Ethiopia: a Cointegration and ECM Approach

Abstract

The long run relationship between saving and investment has been a serious debate in the empirical literature following the pioneering work of Feldstein and Horioka (1980). Most of these works are cross country studies and do not use long period data. The difficulty with such studies is the homogeneity assumption across the countries. Therefore country specific studies are needed to throw more light on the issue. For Ethiopia, such long period studies are either scant or do not exist. This paper tries to fill this gap and attempts to study the causal link between savings and investment in Ethiopia using cointegration method. The evidence suggests that there is no causation between savings and investment in either direction in Ethiopia. Based on these results some policy measures are recommended.

Key words: Saving, Investment, Cointegration, ECM, causality, Capital mobility and Current account balance.