Factors Affecting Gross Domestic Saving in Ethiopia: A Vector Error Correction Model Approach

Abstract

The objective of this study is to investigate the short run and long run factors affecting gross domestic saving in Ethiopia using time series data covering the time period of 1985 to 2020. To achieve this desired objective, the study employed Johanson cointegration test to identify the existence of long run relationship between variables after data stationarity has ensured using Augumented Ducky Fuller test. The results reveal that there are up to four cointegrating equationtion in the model. The study also employed Vector Error Correction Model to identify the impacts of factors affecting gross domestic saving in Ethiopia both in short run and lang run. The results reveal that only gross domestic product, real interest rate, annual broad money growth rate and government final consumption expenditure have statistically significant effect on gross domestic saving in Ethiopia in the short run. In long run, Illicit Financial Flows, government final consumption expenditure and annual broad money growth rate have statistically significant negative impact on gross domestic saving while official development assistance, gross domestic product, real interest rate, and inflation rate have statistically significant positive effect on gross domestic saving cetries purbus. The Granger causality test results reveal that there is unidirectional causal relationship between gross domestic saving and illicit financial flows, real interest rate, annual broad money growth rate, official development assistance and inflation rate that runs from these variables to gross domestic saving except for inflation rate that runs from gross domestic saving to inflation rate. Unlike other variables, gross domestic product and government final consumption expenditure have bidirectional causal relationship with gross domestic saving in Ethiopia over the study period.