Analysis Of Domestic Saving On Fastening Economic Growth In Ethiopia: Vector Error Correction Approach

Abstract

Saving has always figured prominently in both theoretical analysis and policy design in both developed and developing economies. Banking services is performed in the form of mobilizing saving (deposit), extending credit, international banking (trade, foreign exchange and money transfer) and other legal transfer payments. There are scant current literatures on the determinants of saving on fastening economic growth. This study used co-integration and vector error correction model (VECM) to examine the effect and causal relationship between the growth rate of real Gross Domestic Saving (GDS) and growth rate of real Gross Domestic Product (GDP) for Ethiopia. In the process of analysis, the time series properties of macroeconomic variables were ascertained by using the ADF unit root test procedure. Finally, the long-run relationship between variables was explored by utilizing the Johansen procedure. The estimated results indicated that one order of integration or I(1) for the series was considered. From the result, the coefficient of the co-integrating equation tells that about 36 percent of equilibrium corrected each year by change in aggregate domestic saving. Gross domestic saving in Ethiopia is affected by age dependency ratio, real exchange rate, real interest rate, real gross domestic product, foreign capital inflow and money supply both in the short and long run. Saving is positively related to income level or GDP growth and terms of trade. Elasticity of exchange rate with respect to domestic saving is low and insignificant in the short run and high and significant in the long run. This implied that continuous depreciation of real exchange rate have a positive impact on domestic saving. Addressing institutional (through sensible policies such as formalization of the informal sector), and structural problems (such as infrastructural provision and efficient and relevant education policy) is also noted in the empirical literature as influencing saving mobilization.

Key Words: Cointegration, Growth, Model, Saving, Vector Error Correction