Dynamic Interaction between Saving, Investment and Economic Growth in Ethiopia

Abstract

The purpose of this research is to inves-tigate the dynamic interaction between savings, investment and economic growth in a case of Ethiopia by using quarterly time series data of National Bank of Ethiopia (NBE) from the periods 1992/93 to 2019/20. Consequently, the Vector Error Correction Model (VECM) results showed that there was a positive long run relationship between savings, investment and economic growth in Ethiopia. Granger causality from domestic invest-ment and real GDP to domestic savings and domestic investment granger causes economic growth. The response of do-mestic investment to a positive shock of real GDP is positive. Investment and money supply reacts positively to shocks of domestic saving. Whereas, the ex-change rate responds adversely to the shock of investment. In the short run the reaction of saving to shocks of real GDP and investment was positive and negative respectively. Whereas, shocks of saving generate a negative effect in the short run and insignificant effect on economic growth in the long run. Real GDP re-sponds negatively to shocks of interest rate and exchange rate. Besides, the var-iance decomposition results show that the variation of economic growth is largely explained by shocks to itself and in-vestment. The variation in saving ema-nates from the money supply, domestic savings, real GDP and investment. In-vestment deviation is also emanating from Real GDP and saving. Thus, the govern-ment and stakeholders are supposed to practice macroeconomic policies that will promote economic growth and gross domestic investment and thus saving will increase.