The Savings-Inflation Puzzle: Explaining Their Relationship in Ethiopia

Abstract

The objective of this study is to show the effect of inflation on savings in a Small open economy Ethiopia for the period 1974-2014 using autoregressive distributed lag (ARDL) and ECM. The result of Cointegration test, using ARDL bounds testing approach, indicates the existence of long run relationship among the variables entered in the regression model and between inflation and national saving .To explores the direction of causality between inflation and National saving Granger Causality test has been employed. The direction of causation test indicated the existence of unidirectional causality running from inflation to saving, but saving does not granger causes inflation. Further, the long run estimation result shows that there is significant positive effect of inflation on national saving in the long run and insignificant negative effect in the short run.

Keywords: ARDL, Ethiopia, Inflation Savings