Abstract:
The causal relationship among savings, investment and growth is mixed and controversial
both theoretically and empirically. There is large empirical literature which examines the
savings-growth nexus within a bivariate framework. There is also a considerable literature
which looks at the relationship between economic growth and investment. However, little
attention has been given to examining the causal relationship between economic growth,
savings and investment within a multivariate framework. This paper examines the causal
relationship among savings, investment and economic growth in Ethiopia using annual
time series data from 1969/70-2010/11 in a multivariate framework. Results for ADF and
PP unit root tests show that all variables under consideration are I(1). Result from the
ARDL Bounds Testing indicates that there exists cointegration among gross domestic
savings, gross domestic investment, gross domestic product, labor force and human capital
when GDP is taken as dependent variable. Labor and investment have significant positive
effect on economic growth of Ethiopia both in the short-run and in the long-run while GDS
and human capital are statistically insignificant. Moreover, Toda-Yamamoto and DoladoLutkepohl as well as Innovative Accounting Techniques (i.e., IRFs and FEVD) approach to
Granger causality analysis shows that there exists bidirectional causality between gross
domestic investment and economic growth as well as between gross domestic savings and
gross domestic investment. Granger causality running from investment to savings and from
investment to growth is stronger as witnessed from impulse responses and variance
decompositions. However, there is unidirectional Granger causality running from
economic growth to gross domestic savings though it is weak. Therefore, the country is
required to increase savings and investment, with due emphasis given to investment due to
its dual effect, to attain high and sustained economic growth.
