Inter-Play Between Saving, Inflation and Economic Growth in Ethiopia: Linkage and Threshold Analysis

Abstract

The main purpose of this study was to investigate the interplay between savings, inflation and economic growth, and to estimate the threshold level of inflation that is consistent for the economic growth of Ethiopia. 2SLS technique was applied within the framework of Simultaneous equation model using time series data from 1981 to 2015. OLS model was also used for estimating the optimum threshold level of inflation rate for the economic growth. The relationship between domestic saving and economic growth has been found to be one directional and positive; growth causing saving. Foreign aid and final consumption has found positive and significant effect on economic growth. The study has also found significant and positive bi-directional relationship between economic growth and inflation. Inflation has adverse effect on domestic saving and inflation is also negatively affected by Opines to trade. The findings of OLS estimation suggested that 12% threshold level of inflation was consistent for the economic growth of Ethiopia; inflation rates below this threshold level do not have any significant impact on economic growth. These widely deviating findings for Ethiopia requires policy efforts that are relevant for development of a country. In order to achieve high economic growth, policy efforts must be focused on increasing saving, this would eventually induce growth in the economy through widening investment.

Keywords: Economic Growth, Saving, Inflation, Threshold Level, Simultaneous