The objective of this paper was to investigate the macroeconomic determinants of gross national 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 national saving in Ethiopia using an ARDL bounds testing approach and ECM to capture both short run and long run relationships. Estimated results revealed that financial development (FD) and Current account deficit (CAD) are significant determinants of gross national saving in Ethiopia in the long run. But gross national disposable income (LGNDI), dependency ratio (DR), budget deficit (BD) and inflation, approximated by consumer price index (CPI), found to be statistically insignificant determinants of gross national saving in Ethiopia in the long run.
However, in the short run, except consumer price index (CPI) and dependency ratio (DR) the rest of the explanatory variables such as gross national disposable income (LGNDI), financial development (FD), current account deficit (CAD) and budget deficit (BD) found to have statistically significant meaning in explaining gross national saving in Ethiopia. The speed of adjustment has value 0.66978 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.
Table of Contents
Chapter One Introduction
1.1. Background of the Study
1.2. Statement of the Research Problem
1.3. Objective of the Study
1.3.1. General Objective
1.3.2. Specific Objectives
1.4. Significance of the Study
1.5. Scope of the Study
1.6. Hypothesis of the Study
1.7. Limitation of the Study
1.8. Organization of the Study
Chapter Two Literature Review
2.1. Theoretical Literature Review
2.1.1. Measurement Issues
2.1.2. Saving and Consumption Smoothing
2.1.2.1. Franco Modigliani and the Life-Cycle Hypothesis
2.1.3. Saving, Interest Rate and Economic Growth
2.1.3.1. Harrod - Domar Growth Model
2.1.3.2. Saving and Economic Growth
2.1.3.3. The Importance of Saving
2.1.3.4. Changing the Rate of Saving
2.1.3.5 How Changes in the Real Interest Rate Affect Consumption and Saving
2.1.4. Saving and External Sector
2.1.5. Saving and Macroeconomic Policies
2.1.6. Saving and Institutional Considerations
2.1.6.1. Financial Intermediation and Capital Markets
2.1.6.2. Compulsory Public Pension Schemes
2.1.7. More on Microeconomic Foundations of Saving
2.1.7.1. Saving Motives of Individual Households
2.1.7.1.1. Retirement Motive
2.1.7.1.2. The Bequest Motive
2.1.7.1.3 Precautionary Motive
2.2 Empirical Literature Review
Chapter Three Source of Data and Model Specification
3.1. Type and Source of Data
3.1.1. Type of Data and Variable Description
3.1.1.1. Dependent Variable
3.1.1.2. Explanatory Variables
3.1.2. Source of Data
3.2. Method of Data Analysis
3.3. Model Specification
3.3.1. Test for Cointegration (Bounds Test)
3.3.2. Long Run Representation of the ARDL Model
3.3.3. Short Run Representation of the ARDL Model
3.4.1 Unit Root Test
3.5. Lag Length Selection Criterion
Chapter Four Overview of the Ethiopian Economy and Gross National Saving
4.1. Macroeconomic Performance in Ethiopia
4.2. Trend of Gross National Saving Over Time (1970/71 to 2010/11)
4.3. Trend of Gross National Saving Ratio, Gross Fixed Capital Formation as share of GDP and Saving Gap Overtime
4.4. Gross National Saving ratio, Nominal Deposit Interest Rate and Growth in Gross National Disposable Income
4.5. Gross National Saving ratio, Financial Development and Macroeconomic Stability
4.6. Gross National Saving and Fiscal Policy
4.7. Gross National Saving and External Sector
Chapter Five Empirical Analysis and Estimation
5.1. Description of the data set used in Estimation
5.2. Unit Root Test
5.3. Bounds Test for Co-integration
5.4. Long Run Representation of the Auto-Regressive Distributed Lag Model (Bounds Test Approach)
5.5. Short Run Representation of the ARDL Model Bounds Test Approach (Error-Correction Representation)
5.6. Determinants of Gross National Saving in the Study (Expected Vs Actual Sign)
5.7. Diagnostic Test
5.8. Model Stability – The CUMSUM Test
Chapter Six Conclusions and Policy Recommendations
6.1. Conclusions
6.2 Policy Recommendations
Research Objectives and Themes
The primary objective of this research is to empirically investigate the macroeconomic determinants of gross national saving in Ethiopia using annual time series data covering the period 1970/71 to 2010/11. By applying the Autoregressive Distributed Lag (ARDL) bounds testing approach and the Error Correction Model (ECM), the study aims to identify both short-run and long-run relationships between gross national saving and various macroeconomic indicators.
- Macroeconomic determinants of gross national saving
- Short-run and long-run dynamics using ARDL bounds testing
- Role of gross national saving in financing domestic investment
- Impact of financial development, fiscal policy, and external sector on saving rates
- Evaluation of policy implications for saving mobilization in Ethiopia
Excerpt from the Book
2.1.3.1. Harrod - Domar Growth Model
Every economy must save a certain proportion of its national income, if only to replace worn-out or impaired capital goods (building, equipment and materials). However, in order to grow, new investment representing net additions to the capital stock are necessary. If we assume that there is some direct economic relationship between the size of the total capital stock, K, and total GDP, Y—for example, if $3 of capital is always necessary to produce a $1 stream of GDP—it follows that any net additions to the capital stock in the form of new investment will bring about corresponding increases in the flow of national output, GDP.
Suppose that this relationship, known in economics as the capital-output ratio, is roughly 3 to 1. If we define the capital-output ratio as k and assume further that the national net saving ratio, s, is fixed proportion of national output and that total new investment is determined by the level of total savings, we can construct the following simple model of economic growth (Michael P. Todaro and Stefen C. Smith, Economic Development, 2009).
1. Net saving (S) is some proportion, s, of national income (Y) such that we have the simple equation S = sY………………………. (3.1)
2. Net investment (I) is defined as the change in the capital stock, K, and can be represented by ΔK such that I = ΔK……………………… (3.2)
Summary of Chapters
Chapter One Introduction: Provides background on the importance of saving for economic development in Ethiopia, defines the research problem regarding the saving-investment gap, and outlines objectives and hypotheses.
Chapter Two Literature Review: Discusses theoretical and empirical literature related to saving behavior, including measurement issues, life-cycle hypothesis, Harrod-Domar and Solow models, and previous studies on saving determinants.
Chapter Three Source of Data and Model Specification: Describes the data sources, variable definitions, and the econometric methodology, specifically the ARDL bounds testing approach and Error Correction Model.
Chapter Four Overview of the Ethiopian Economy and Gross National Saving: Traces the macroeconomic performance of Ethiopia and analyzes trends in gross national saving, capital formation, and fiscal/external sector indicators.
Chapter Five Empirical Analysis and Estimation: Presents the results of unit root tests, cointegration tests, and the estimated long-run and short-run ARDL models along with diagnostic and stability tests.
Chapter Six Conclusions and Policy Recommendations: Summarizes the study findings and suggests macroeconomic and financial sector policy measures to enhance the saving rate in Ethiopia.
Keywords
Gross National Saving, ARDL, Cointegration, Ethiopia, Financial Development, Current Account Deficit, Macroeconomic Stability, Budget Deficit, Economic Growth, Saving-Investment Gap, Error Correction Model, Disposable Income, Dependency Ratio, Inflation, Fiscal Policy.
Frequently Asked Questions
What is the core focus of this research paper?
The research focuses on analyzing the macroeconomic determinants of gross national saving in Ethiopia using annual time series data from 1970/71 to 2010/11.
What are the primary themes addressed in the study?
The central themes include the relationship between saving and economic growth, the impact of financial development, the influence of fiscal policies (budget deficits), and the role of the external sector (current account deficits) on national savings.
What is the primary objective of this work?
The main objective is to identify and quantify the long-run and short-run macroeconomic determinants that influence the gross national saving ratio in Ethiopia.
Which scientific methodology is utilized in this paper?
The study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach for cointegration and the Error Correction Model (ECM) to capture dynamic relationships between variables.
What aspects are covered in the main body of the paper?
The main body covers theoretical frameworks (life-cycle hypothesis, Harrod-Domar, Solow), detailed data analysis, empirical model estimation, diagnostic testing, and the interpretation of results concerning saving determinants.
Which keywords best characterize this research?
Key terms include Gross National Saving, ARDL, Cointegration, Ethiopia, Financial Development, Macroeconomic Stability, and Error Correction Model.
How does the paper define financial development for the Ethiopian context?
Due to data quality issues with broad money measurements, the paper uses "currency as a share of narrow money" as the specific indicator for financial depth in Ethiopia.
What is the significant conclusion regarding the error correction term?
The study finds a significant negative error correction coefficient of approximately 0.67, indicating that 67% of deviations from long-run equilibrium are corrected within a year, confirming the existence of a stable long-run relationship.
Does the paper confirm the Ricardian Equivalence hypothesis for Ethiopia?
The findings regarding budget deficits in the short run suggest that private savings are able to offset government saving changes, providing evidence that Ricardian Equivalence holds to some extent in Ethiopia.
- Quote paper
- Yohannes Ghebru Alemayehu (Author), 2014, An Empirical Time Series Analysis on the Determinants of Gross National Saving in Ethiopia. ARDL Approach for Co-integration, Munich, GRIN Verlag, https://www.grin.com/document/281887
