Dynamic Interaction Between Saving, Investment and Economic Growth in Ethiopia

Abstract

The study investigates the dynamic interaction among domestic savings, investment and economic growth in Ethiopia with in the period 1992/93 to 2019/20 by utilizing quarterly time series data obtained from National Bank of Ethiopia (NBE). The Vector Error Correction Model (CVECM) results indicated that there was a positive long run relationship among savings, investment and economic growth in Ethiopia. Granger causality from domestic investment and real GDP to domestic savings and domestic investment granger causes economic growth. The response of domestic investment to a positive shock of real GDP is positive. Investment and money supply responds positively to shocks of domestic saving. Exchange rate responds negatively to shock of investment. In the short run the reaction of saving to shocks of real GDP and investment was positive and negative respectively. While in the long run the effect becomes vice versa. Shocks of saving generate negative effect in the short run and insignificant effect on economic growth in the long run. Real GDP responds negatively to shocks of interest rate and exchange rate. Besides, the variance decomposition results show that the variation of economic growth is largely explained by shocks to itself and investment. The variation in saving emanates from money supply, domestic savings, real GDP and investment. Investment deviation is also emanated from Real GDP and saving. Thus, government and stakeholders are supposed to practice macroeconomic policies that will promote economic growth and gross domestic investment and thus saving will increase Keywords: Dynamic, GDP, Saving, Investment, Economic, Growth, Ethiopia DOI: 10.7176/JESD/13-9-04 Publication date: May 31 st 2022