Saving and Economic Growth in Ethiopia: Causality Analysis

Abstract

The objective of the paper is to investigate causal relationship between savings growtli and GDP growth in Ethiopia by using annual data for the period of 1961 to 2010. In the process, three analyses were undertaken. First, the time series properties of growth rate of domestic savings and the growth rate of real GDP were ascertained using the ADF unit root test procedure. The estimated results indicate both variables are one order of integration at level or 1(1). Second, the long-run relationship between the series was explored utilizing both Engel- Granger and Johnson Cointegration Test procedure. The result of the test indicated that the series were cointegrated. Finally, the causal relationship between growth rate of domestic savings and the growth rate of real GDP was performed using the Vector Error Correction (VECM) model and Pairwise Granger Causality test. Theories and empirical works have shown that the direction of causality between domestic savings growth and economic growth may run in various directions: from gross domestic savings to economic growth, from economic growth to gross domestic savings, bidirectional causality between gross domestic savings and economic growth or no causal relationship between them. The results of this study suggest the long run relationship between savings and GDP in Ethiopia. Farther, the empirical result prevail that unidirectional short run relationship exists between gross domestic product (GDP) and domestic savings; that causality run from gross domestic product (GDP) to domestic savings. So overall short run results favour Keynesian point of view that savings depend upon level of output.