The Causal Nexus between Economic Growth, Investment and Saving using Vector Error Correction Model in Ethiopia

Abstract

Investment and saving are critical for a country's economic development. The primary goal of this research was to determine whether there is a long-run or short-run causal relationship between saving, investment, and economic growth(GDP). We used Vector Error Correction Model and Augmented Dickey-Fulle and Phillips-Perron tests were used to verify the Unit root test. The Johansen Cointegration Test shows that economic growth, savings, and investment are reconciled and are in long-run equilibrium. Vector error correction tests show that there is a unidirectional causal relationship between saving and investment to economic growth in the short-term as well as long-term. There is a bidirectional causal relationship from total domestic savings to total domestic investment. In other words, savings and investment lead to economic growth. Therefore, for this purpose, policymakers need to formulate and implement policies that promote economic growth. Such policies lead to higher growth in savings and investment.