"Does Domestic Saving Cause Economic Growth? Time-Series Evidence from Ethiopia."

Higher saving rates cause higher economic growth. Empirical works have shown that the direction of causality between gross domestic savings and economic growth may result in bidirectional causality between gross domestic savings and economic growth or no causal relationship between them. The objective of this study was to find the direction of causality between gross domestic savings and economic growth of Ethiopia using annual time series data from 1975–2016. Three analyses were undertaken. First, the time series properties of growth rate of gross domestic savings and the growth rate of real gross domestic product were ascertained using the ADF unit root test procedure. Second, the long-run relationship between the series was explored utilizing Johansen Co integration Test procedure. The result of Johansen Co integration Test indicated that the series were co integrated and there is a positive long run relationship between domestic savings and economic growth. Finally, the causal relationship between growth rate of gross domestic savings and the growth rate of real GDP was performed using the Vector Error correction (VECM) model and Pair wise Granger Causality Test. The results showed that there was bi-directional causal relationship between growth rate of gross domestic savings and growth rate of GDP both in the short run and long run in Ethiopia indicating that both the Keynes and the Solow model are relevant for Ethiopia. Thus, policy makers are required to implement policy mixes aiming at increasing savings and growth in Ethiopia.