SAVING AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

The objective of this paper is to investigate causal relationship between gross domestic savingand economic growth of Ethiopia by using annual time series data for the period of 1975/76-2017/18. In order to achieve these objectives by using unit roots tests, multivariate Johansen co integration, Vector Autoregressive (VAR), Error correction model (VECM) and Granger Causality tests were undertaken. The result of Johansen Co-integration Test indicates that there is presence of one co-integrating vector in the model. The long run and short run regression results indicates that though there exists positive relationship between gross domestic saving and economic growth, the impact of gross domestic savings on economic growth is statistically significant in both cases. Finally, the result of Granger causality test reviled that unidirectional relationship exists between gross domestic product (GDP) and gross domestic savings; and the causality run from gross domestic product (GDP) to gross domestic savings. So the overall short run results favor Keynesian point of view that savings depend upon level of output. Based on the findings of study, government and policymakers should employ policies that would increase domestic saving to the extent it becomes a driving force for economic growth.