Abstract
The objective of this paper was to investigate the determinants of domestic saving in Ethiopia using time series annual data form 1970/71-2010/11. In this study, effort has been made to identify the long run and short run determinants of domestic saving in Ethiopia using an ARDL bounds testing Approach and Error correction model (ECM) to capture both short run and long run relationships. The Estimated results revealed that growth rate of income (gPCI), budget deficit ratio (BDR) and inflation rate (INF) were statistically significant short run and long run determinants of domestic saving in Ethiopia. But, depositing interest rate (IR), current account deficit ratio (CADR) and financial depth (DFD) were found to be statistically insignificant determinants in the long run. However, in the short run, DFD and IR found to have statistically significant meaning in explaining domestic savings in Ethiopia. The speed of adjustment has value 0.63768 with negative sign, which showed the convergence of saving model towards long run equilibrium. The overall findings of the study underlined the importance of raising the level of income in a sustainable manner, minimizing the adverse impacts of budget deficit and inflation rate and creating competitive environment in the financial sector. Key words: Domestic saving, autoregressive distributed lag, Error correction model, Ethiopia.
Highlights
Domestic saving is believed to be the main sources of finance to domestic investment
While the data for GDSR, gPCI, budget deficit ratio (BDR), current account deficit ratio (CADR) and degree of financial depth (DFD) were obtained from National Bank of Ethiopia (NBE), the data for inflation rate (INF) and depositing interest rate (IR) were collected from International Financial Statistics (IFS)
The Augmented Dickey Fuller (ADF) and PP (Philips Perron Test) tests in Tables 2 and 3 imply that except gPCI and INF all variables are found to be non-stationary at level and stationary at first difference at the conventional 5% level of significance
Summary
Domestic saving is believed to be the main sources of finance to domestic investment. There have been two main views regarding the means of financing domestic investment. The first view is that, in the world of perfect capital mobility, domestic investments are determined by the international flow of capital. According to this view, domestic investments are highly correlated with foreign capital inflow and less correlated with domestic savings. Since foreign capital is something exogenous, countries that try to depend on foreign capital can be highly affected by external shocks. This is because countries, especially developing countries, will face a serious domestic capital shortage whenever a decline in foreign capital inflow happens. Most economists argue that domestic saving is the major determinant of domestic investment growth which in turn is basic for fast and sustainable economic growth (Feldstein, 1983; Khan, 2006 and Culpeper, 2008)
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