NEXUS AMONG INTEREST RATE, DOMESTIC SAVING, INVESTMENT AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

In this study, the relationship between Interest Rate, Domestic Saving, Investment and Economic Growth in Ethiopia 1981/82 to 2019/20 is tested empirically. The study was employed a modern econometrics technique such as, unit root test, lag selection criteria, cointegration test. The descriptive analysis found that in the study period the average value of their fluctuation interval of Interest Rate, Saving, and Investment and other control variables. The ADF and PP unit root test was employed. All the variables used in this study were found to be stationary in their first difference. Long-run relationship among variables confirmed through Johnson co-integration analysis whereas the short-run dynamics observed by VECM specification. From the finding interest rate and inflation have negative and significant effect on economic growth. National Saving (NS) is statistically significant and positive relationship with explaining economic growth in the long run and the lagged investment has a positively significant effect on economic growth The positive sign of Saving and Investment shows that the long-run impact on Economic growth. However, from the long run relationship between economic growth and lagged Interest rate was found to be negative. Saving and Investment have unidirectional causality running from economic growth to Investment and Saving, the vice versa is not true. For the case of Ethiopia, investment play a major role in contributing to economic growth; the investment increase in a country in short or in long run have major effect. This implies that the conventional wisdom that higher level of investment leads to economic growth affect positively in Ethiopia. The economic growth with respect to lagged labor force, gross capital formation and inflation was found to be positive in the long run impact on Economic growth, finally the study recommends that invest more in saving and investment rather than increasing interest rate.