Determinants of National Saving in Ethiopia: Time Series Analysis

Abstract

In poor countries like, Ethiopia national saving have a vital role for capital accumulation, which facilitate domestic investment and economic growth. Accordingly, this paper mainly investigates the covariate that determines national savings specifically in Ethiopia based on the time series data collected from year 1984-2016E.C. The main objective of the study is to identify trend of and the major covariates that determine national saving in Ethiopia. Five covariates (variables) have employed, namely national saving, real GDP, investment, deposit rate, and inflation rate. Autoregressive distributed lag (ARDL) approach to co-integration and error correction model (ECM) has applied to analyze the long run and short-run relationship between the explained and explanatory variables. The long-run model result revealed that, the Real Gross Domestic Product, investment, deposit rate, and inflation have shown a similar relationship. Accordingly, Real Gross Domestic product, investment, deposit and inflation rate, are significantly and positively correlated with national saving. However, in the short-run, except deposit rate all independent variables affect national saving positively. The error correction term has a coefficient of -100.66 which shows that there will be about 100.66% percent speed of adjustment toward long run equilibrium in each year when there is any imbalance in the short run. Finally, as the model result revealed, national saving responded to the real gross domestic product, investment and deposit rate on the theoretically expected manner, however not for the inflation rate. Then the paper recommends increasing an alternative to enhance performance of national saving by considering its contribution for economic growth and development of Ethiopia.