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.