Does foreign aid crowd out domestic saving in Ethiopia: ARDL model approach

Abstract

This paper attempted to examine the relationship between domestic savings and aid in the context of Ethiopia during the period 1996 to 2018 by using ARDL framework. What is more, by disaggregating aid according to its source, the impact of aid from bilateral and multilateral donors on domestic savings is also analyzed. The other distinct feature of this study is that using a Pair-Wise Granger Causality it attempts to investigate the causality between the two variables. The result indicates that increases in aggregate aid are associated with a decline in domestic savings in the long run, also though its impact in the short run is insignificant. Turning to different kinds of aid, bilateral aid is found to have a significant negative association with savings in the long run. However, multilateral aid appears to increase domestic savings and helps the level of domestic savings from becoming worse than the current situation the causality test performed points that there exists two-way causality between the two variables, it indicates that there is bidirectional causality between aid and savings.