Predictors of National Saving: A Time Series Analysis to the Economy of Ethiopia

Abstract

Being an important source of loanable funds, which in turn, are allocated for financing investment undertakings, national saving plays vital role in explaining the macroeconomic performance. No doubt, efficiently utilized savings have a large potency in building bases for strong and sustainable economic growth and the overall wellbeing of the nations. However, as the level of resources diverted to the saving account are subject to various shocks, both internal and external, most economies are still challenged in maintaining resources in the form of saving. As a result, investment decisions in particular and economic policy making at large are highly challenging especially in LDCs. Motivated by this scenario, the present study was principally intended to examine the potential predictors of national saving in the context of Ethiopian economy using the time series data set for the period serially ranging from 1970/71 to 2016/17. After confirming the stationarity among individual variables entered the saving model via ADF approach, the Johnson’s cointegration test was employed to test the existence of long run relationship among them. Accordingly, the test procedure has detected the presence of one way in which the variables move together in the very long run. The short run issues were captured via ECM regression. CPI inflation, foreign aid, national income, financial development and deposit rate variables were found to be important in the long run. In the short run, however, only CPI inflation and national income variables were estimated to have significant impact in favor of national saving in the country. Hence, it could be wise to determine the optimum threshold for inflation to control its disfavored behavior with national saving variable. Besides, resources received in the form of aid should be diverted to investment activities rather than keeping them as reserves in the saving account of the government.

Keywords: Cointegration, ECM, Ethiopia, Gross Saving, Predictors, Unit Root