Foreign Aid, Saving and Economic Growth: The Case of Ethiopia (Cointegration and Causality Analysis)
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Date
2016-06
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Addis Ababa University
Abstract
The study has examined the direction of causal relationship between foreign aid, savings and
economic growth in Ethiopia, using annual time series data from 1974/75 to 2013/2014.
Empirical analysis has been performed by using Johansen Maximum likelihood and pair wise
granger causality method for cointegration and causality test respectively. The main result shows
that foreign aid has a significant and positive effect on economic growth in the long run as well
as in the short run. However, aid has insignificant and negative effect on savings in the long run
while it has significantly negative influence in the short run.
Further, the findings revealed a unidirectional causality running from economic growth to
savings and foreign aid. It shows that unidirectional causality run from economic growth to
savings; and also, there is two ways (feedback), granger causality between foreign aid and
saving, which implies policies designed to stimulate domestic saving also facilitates foreign aid.
To maintain and accelerate growth, should formulate policies to intensify the allocation of
foreign resources into investment projects.
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Keywords
Foreign Aid, Saving and Economic Growth