TOSSA COLLEGE OF ECONOMIC DEVELOPMENT

DEPARTMENT OF BUSINESS ADMINISTRATION (MBA)

DETERMINANT OF PRIVATE SAVING INETHIOPIA FROM 1990-2021

A RESEARCH PROPOSAL SUMMITED TO DEPARTMENT OF BUSINESS

ADMINISTRATION (MBA)

NAME ID No.
1.BREHAN ALEMU.......................... TCED/482/2015

ADVISOR; KELEMEWORK GELETA (PHD)

FEBRUARY: 2016 E.C

DESSIE :ETHIOPIA
TABLES OF CONTENT

TABLES OF CONTENT...............................................................................................1
CHAPTER ONE.......................................................................................................2
1. INTRODUCTION.................................................................................................................................2

1.1 Background of the Study..........................................................................................................2

1.2 Statement of the problem........................................................................................................4

1.3 Research Question....................................................................................................................4

1.4 Research Hypothesis................................................................................................................5

1.5 Objective of the study...............................................................................................................5

1.6 Significance of the Study..........................................................................................................5

1.7 Scope of the Study.....................................................................................................................5

CHAPTER TWO......................................................................................................6
2. LITERATURE REVIEW........................................................................................6
2.1 THEORTICAL APPROCH..................................................................................................................6

2.1.1 DETERMINANT AND THEORTICAL BASIS OF SAVING BEHAVIOR...................................7

2.2EMPIRICAL LITERATURE................................................................................................................9

CHAPTER THREE.................................................................................................13
3. METHODOLOGY...............................................................................................13
3.1 METHODOLOGY AND DATA SOURCE...........................................................................................13

3.2 DATA TYPE AND SOURCE.............................................................................................................13

3.3 DATA ANALYSIS METHODE...........................................................................................................14

3.4 VARIABLE DESCRIPTION..............................................................................................................14

3.5 MODEL SPECIFICATION................................................................................................................15

REFERENCE..........................................................................................................16
CHAPTER ONE

1. INTRODUCTION

1.1 Background of the Study

Saving is the deferral transformation of consumption possibilities to the future by
spending less than the income available in which investment is the use of current
income to accumulate capital asset there by expanding productivity (Kumal and Jams,
2009).

The low level of saving is a typical feature of low income economies such as
Ethiopia. It represents a key impediment to development as it limits
investment.Development economists have been concerned for decades about the
crucial role of mobilization of domestic savings in the sustenance and reinforcement
of the savings investment growth chain in developing economies. This is because the
growth rate registered in most developing countries is often not commensurate with
the level of investment Tiriongo (2005). Saving is primarily used to finance
investment.
The most important issues in development economics are how to stimulate investment
and how to bring about an increase in the level of savings to facilitate increased
investment.

Investment funds may originate from both domestic and foreign sources. Domestic
sources include public and private savings. The latter include savings by households
and private firmswhile the former are the government saving or dissaving. When
domestic resources are not enough to finance investment requirements, external
sources are allowed to fill in this gap. While depending on foreign savings makes the
country highly sensitive to external shocks since foreign capital is something
exogenous. This is because countries, especially developing countries, will face a
serious domestic capital shortage whenever a decline in foreign capital inflow
happens. As a result, domestic savings will continue to be a priority source of
investment financing in order to minimize vulnerability to international economic
fluctuations.

There is no doubt that in developed and developing countries, savings play a key role
in economic growth and development by accelerating the pace of investments in the
economy. This argument has been supported empirically and theoretically by the work
of various scholars. Harrod (1939) and Domar (1946) argued that national savings
accelerate growth via investment The empirical evidence for example by Levine and

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Renelt (1992), found that higher rates of savings have translated into higher
investment and higher growth rates. This result is consistent with the work of Romme
(2003) who did a study on South Africa and found that private savings rate has a
direct effect on economic growth through private investment. However, the extent to
which the higher rate of savings in a country is translated into higher investment
depends on well-connected financial structure in form of financial institutions, assets
and markets that link savers and investors by bridging the information gap and the
transaction costs that may be involved.

Real GDP growth in Ethiopia registers many ups and downs. During 1984 and 1985
growth rate decline by 6.3 and 9.7 percent respectively this because during this period
there was a wide spread famine caused by shortage of rainfall, after this period it
starts to show a little improvements, but it show decline in 1991 and 1992 following
the regime changes in the countries, and also it shows a decline by 1.4% in 1998
following war with Eretria on a border dispute case which affected the economy
negatively. The poor performance of the private saving rate as a percentage of GDP
was mainly due to the exclusive control of economic activity by the government until
early 1990s while, following the regime change in 1992 many macros economic
reforms have been taken place; of which adoption of market economic policy,
privatization of public enterprises, financial sector reforms including the opening of
private banks, insurance companies and micro finance institution are among the
majors. As a result, private saving rateincreased on average by 32.2% from 1994 to
2015 (Ayelle, 201o).

In Sub-Saharan African Countries, the rate of economic growth has been impeded by
the low level of savings mobilization making them depend much on foreign assistance
in form of loans and aid to cover their current account deficits. This scenario is
evident in the work of Mwega andElbadawi (1998) who revealed that the rate of
private savings in SSA declined from 11.4% to 7.5% of disposable income during the
1970s to 1980s. However, the decline was later recovered though partially to less than
9% in the 1990s.All this empirical evidences suggest that for one countries
development mobilizing sufficient domestic savings both in terms of public and
private saving play a crucial roles by stimulating investments in the economy.
Therefore, understanding the dynamics behind private saving and the possible policy
options to increase the national savings rate will be the main interests for both
researchers and policy makers. This Study Will be different from other previos study
in time period ,data and variable..

1.2 Statement of the problem

Savings is an issue of fundamental importance in the economy and hence of interest

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for both academics and policy makers. While for an individual, saving is essentially a
way to move resources over time (postpone consumption), for the economy as a
whole the supply of savings represents an important source of financing investment.

Economic growth is the main targets of all countries all over the world including both
developing and developed countries. Among other things real growth domestic
product (RGDP) is the good indicator of economic growth. The higher GDP implies
higher income and thus leads to higher livings of standard. Saving has direct and
positive relationship with RGDP. Therefore, most effort to increase real growth
domestic product (RGDP) and thus economic growth rely on saving (Mogab and
Meelung, 2004).

Ethiopia registers ups and downs in saving rates throughout the study period. Now a
daycountryregisters double digit economic growth for last ten consecutive years
around 10.9 percent. Following this special attention is given by the central
government of Ethiopia to mobilizing domestic resources for investment, because
government is a leading actor to makes the economic policies which govern the
savings and investment behavior of other sectors, because they are responsible for
raising a large volume of revenue to finance investment expenditure in the economy.

In Ethiopia empirical w-q-orkers are done by different researchers like Abu (2004),
Kidane(2009), and Worku(2010) to analyze the determinant of different variables. All
those previous researchers concentrated on analyzing the determinants of total saving
without separating public saving from private savings. But, Ayelle (2016)
studiesconcentrated on determinants of private saving in Ethiopia that provides
possible explanatory variables in a private saving equation as well as broad guidelines
for the expected sign of the coefficients estimated. Despite the fact that private saving
plays the key role in growth and development,little is known about the determinants
of private saving in Ethiopia. Therefore, this study will be different from the previous
studies by the period, data and variables that will be include in the analysis(1990-
2020).

1.3 Research Question

Depending on the mentione above the researcher will try to solve following research
questions.

. what looks like the trends of private saving in Ethiopia?

.What are the majore determinantes of private saving in ethiopia?

1.4 Research Hypothesis

-An increasing in real gross domestic product has to a positive effect on private
saving.

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-Inflation has inverse relationship with private saving.
-Age dependency ratio has inverse relationship with private saving.
-Curent account defficite has inverse relation ship with private saving

1.5 Objective of the study

1.5.1 General objective of the Study

The main objective of this study will be to identify the major determinant of private
saving in Ethiopia.

1.5.2 Specific objective of the Study

-To show trends of private saving in Ethiopia.
-To examine the majore factore affecting private saving in ethiopia.

1.6 Significance of the Study

saving has play agreat role in the economic growth of the country. so the result of this
study will be to achieve the following advantages.
First the paper will investigate the majore determinants of private saving in the
country.
It will give batter understanding about the results of the research use as reference for
those who are interest to conduct other related research. It will provide information
about the trend of private saving.

1.7 Scope of the Study

This study will be the general levele analysis which identify the majore determinante
of private saving Ethiopia . In doing so 30 years of secondary data will be coverd
from 1990-2020.

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CHAPTER TWO

2. LITERATURE REVIEW

2.1 THEORTICAL APPROCH

Theoretically, there are many factors that determine the saving performance of a
country. The most important factors as shown in many studies are those related to
income, real interest rate, fiscal policy, macroeconomic stability, the extent of
financial sector development, and external variables. Accordingly same of the
theoretical frameworks of those determinants are analyzed as follows;

Private saving has been defined as the remaining income or unused income of the
private citizens after paying taxes and spending on consumption goods(mankiw,2011),
which includes those used to finance firm/institution in the equity market/bond
market, or invest in real assets such as properties and real estate’s (Leinsdorf
M.B.,2005). Hence, a formula has been created based on the definition to measure
private saving PS (private saving) =Y (income) –T (taxes)–C (consumption).

Saving can be explained as part of disposable income that is not allocated to

consumption. Therefore, consumption and saving decision of economic agents in one
period are simultaneously taken. Economic agents intended to increase their utility
through their consumption decisions. However, usually they do not only focus on
consumption today, but also on the future consumption. Therefore, the consumption
decision of economic agents is taken in an inter-temporal frame work and
dynamically linked.
Inflation might affect saving behavior through various mechanisms and could be
positive or negative. Most of the studies on the impact of inflation on savings found
that inflation has substantial negative impact on savings (Heer&sussmuth, 2006). This
is due to high inflation causing rising opportunity cost in holding money and
increases the benefits of spending and consuming, hence reducing saving (Miller
Benjamin, 2008). The impacts on savings are dependent the house hold’s reactions to

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a rise in inflation (Chopra, 1988). Thus, a rise in inflation should have a positive
effect on savings. In particular, (Deaton, 1977) affirms that private saving may
increase with rising inflation if consumers misinterpret an increase in nominal prices
for an increase in the real prices and decided not to spend. Hence, the effect of
inflation on saving rate is ambiguous theoretically and practically (Heer and
Suessmuth, 2006; and (Deaton and Paxson, 1993).
Theoretically, there are many factors that determine the saving performance of a
country. The most important factors as shown in many studies are those related to
income, fiscal policy, depositing interest rate, macroeconomic stability, the extent of
financial sector development, and external variables. Life-cycle hypothesis (LCH)
proposed by Modigliani (1986) advocated that saving is a positive function of income
growth. Higher rate of income growth means the aggregate income of active workers
will rises, which in turn raises the life time resources of individuals on which
consumption and saving depends. As result, income growth will result an increase
aggregate saving. However, Tobin (1967cited in Oz can et al., 2003) argued that the
above conclusion works if future income is anticipatable. If future income is
anticipatable, forward looking individuals will expect higher income in the future
which motivates them to consume more today. This reduces the saving rate of
working individuals and may offset the greater effect of higher income growth.
Interest rate is considered as one of the financial variables that have an impact on
saving. The relation between interest rate and savings is ambiguous theoretically
because interest rate changes are subject to250J.Econ.Int.

Finance potentially offsetting positive substitution and negative income effects

(OZcanetet, 2003). The substitution effect is that a higher interest rate raises the
current price of consumption relative to future price. This reduces current
consumption and increase saving. The income effect, on the other hand, is that if the
households are net lenders, an increase in interest rate will increase lifetime income,
and so increase present consumption by decreasing saving. In this case, if the
substitution effects out way the income effect, aggregate saving will rise and vice
versa.

2.1.1 DETERMINANT AND THEORTICAL BASIS OF SAVING BEHAVIOR

This section will start with the theoretical basis of private saving behavior and
explains potential determinants that could affect personal saving. Extensive literature
provides theoretical and empirical evidence on private saving and out lines relevant
determinan
It is well known that individual seek to stabilize consumption over time. There two
major hypotheses to explain individual saving for smooth consumption: the life cycle
hypothesis (LCH) and permanent income hypothesis (PIH). Life Cycle Hypothesis
and Permanent Income Hypothesis from childhood to retirement, people earn, save

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and consume. The Life cycle hypothesis (LCH) explains the expectations of
individuals for future consumption. The most important determinant of the LCH is the
decision to the Journal of Applied Business Research –September/October 2010
Volume26, Number save, and this decision involve choices between current and future
consumption. Consumption and saving behaviors can be explained by LCH. This
relationship between consumption, income and income expectation is examined by
Fisher (1930), Harrods (1948), and Modigliani and Brumberg (1954).There are a
number of theories from the literature that explain the saving behaviors thus are
discussed below.

INTERNAL DETERMINANT OF SAVING

Many internal motives may play a decisive role in personal saving. Among them, we
consider lagged private, income; tax, young/old dependency ratio, credit outstanding,
and status of employment and real estate loans. Metin-Ozcanet al. (2003) argues that
saving rates contain inertia, even if they are serially correlated after controlling for
other factors. Thus, the lagged private saving rate should be included as a determinant
of savings. Most of the studies will concerning the decline private saving rate have
pointed to the fact that people consume more than their income, especially their net
disposable income. Lack of self- control results in people consuming more than their
income, thus forcing increased borrowing. Further, the increase in home prices can be
reason for people to borrow more. Economists view consumption and saving as
highly related with future expectations. As mentioned above, many economists relate
this behavior to LCH and PIH. Using these hypothesis, economists calculate that one-
dollar increase consumption about 3-5 cents.
The relationship between saving rate and age is imperative critical factor. As seen in
LCH and PIH, people have expected income or profit returns. Using micro data,
Wachtel (1984), Knnickell (1990) and Bosworth et al. (1991) find that U.S saving rate
has a small relationship with the population age. On the other hand, Heller (1989),
and Masson and Tyron (1990) estimate that saving depends strongly on population
age. By doing a regression between the saving rate ratios of people aged 65 and over
compared to working age people, Houthakker (1965) and Modigliani (1970) show
that the larger the percentage of population of 65 and older, the greater the negative
effect on the saving ratio. Feldstein (1977), Barro and MacDonald (1979), Feldstein
(1980), Koskela and Viren (1983), and Slemrod (1988) show that saving rate is
indirectly related to the population age and should be examined to find whether there
is a relationship.
EXTERNAL DETERMINANT OF SAVING

In addition to internal factor for the personal saving, economic performance

/provision of the country may be a major potential determinant of saving. Numerous
studies discuss the relationship between saving and growth.

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The Journals of Applied Business Research –September/October 2010 Volume 26,
number 5 and suggest that countries with higher income levels tend to have higher
saving rates. Another variable under consideration is real interest rate. The effect of
this variable is ambiguous in the literature, since studies shows that the interest rate
leads to opposing substitution and income effects. Yet, empirical studies show that the
interest elasticity of private saving is week, implying that the negative income effect
of higher interest rates is likely to deactivate its positive substitution effect. The next
domestic external factor for consideration is a country’s social security system. Evans
(1983) and Feldstein (1980, 1995) argue that saving will tend to decline as benefits
available from the social security system increase.
The othere external variables that might be relevant to savings are the current account
deficit. It is supposed that an increase in the current account deficit (foreign saving) is
associated to a partial decline in private saving, as foreign saving may tend to act as a
substitute to domestic saving (Özcan et al, 2003

2.2EMPIRICAL LITERATURE
Empirically, many studies have been examined both in developed and developing
countries that trying to point out the key variables that should be considered when
studying the private saving behavior. Following are some of the reviewed studies on
private savings behavior.

Aasim M. Husain (1996) examines the long-run behavior of saving in Pakistan for the
period 1970 – 1992 by using Engle – Granger cointegration test. The rates of private
saving in Pakistan remain low compared to many of the developing economies in
Asia, despite a gradual increase over the past twenty years. Empirical analysis of the
long-run behavior of saving in Pakistan suggests that financial deepening, though still
at a relatively early stage of development, accounted for much of the rise in private
saving. In contrast to the experience in the economies of Southeast Asia, where the
demographic structure of the population significantly changed over the past two
decades, high rates of population growth have kept the age structure of Pakistan’s
population virtually unchanged and appear to account for the disparity between the
saving rates in Pakistan and Southeast Asia. Other factors, such as wealth and public
sector indebtedness may

have also influenced the long-run evolution of saving in Pakistan. The study
emphasizes that an increase in the long-run rate of private saving will likely require
further financial development and a decline in the growth rate of the population.
Nwachukwu and Egwaikhide (2007) postulated that the life cycle hypothesis is the
principal theoretical underpinning that has guided the study of savings behavior over
the years. Each of the determinants of saving is articulated in the context of the life
cycle hypothesis which hypothesis that the determinant of saving behaviors include
income, growth of income, interest rate, inflation and macroeconomic stability, fiscal

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policy, external debt, term of trade and financial development. While Ayanwu and
Oaikhenan (1995) opened that the level of income, the rate of interest, inflation rate
and expectation about inflation rate, interest rate and income and the availability of
savings facility such as commercial bank are the factors that determines savings.
Ahmad and Ashaghar (2000) noted that in less developed countries most of the
savings are done by the house hold. Using ordinary least square (OLS) estimation
techniques to estimate the house hold savings behavior in Pakistan for the period
1998/99 and finds that wealth, employment status, education, age and dependency
ratio are factors that influenced house hold savings.
Gilles and Dnise (2000) examine the long run determinants of the personal savings
rate in Canada over the 1965-96 period and concluded that the interest rate, expected
inflation, the ratio of the all-government fiscal balance to nominal GDP, and the ratio
of house hold net worth to personal disposable income are the most important
determinant of the trend savings rate in Canada. In Namibia, Ipumbu and Garson
(1999) employed co integration and error correction modeling(ECM) econometrics
techniques to determine the long and short- term impacts of determinants of saving
and investment.
The results revealed that private saving in Namibia is only significantly influenced by
real income, while bank deposit rates experts little, if there is any, influences.
Furthermore, factors such as real lending rates, inflation and real income and
government investments are important determinants of investment in Namibia. It is
revealed that Namibia savings level has been satisfactory by international standards,
but the investment performance has been disappointing, resulting in a slower
economic growth than expected.
Aktas, Guner, Gursel and Uysal (2012) evaluate the structural determinants of house
hold savings in Turkey from the 2003 to 2008. Using house hold budget survey; the
results indicated that dependency ratios of households are important determinant of
savings. Lower share of dependent children or dependent elderly in the house hold
imply higher saving rate. Also females labor force participation has significant effects,
i.e. house hold with higher share of working females, have higher saving rates as well.
The author reported that households in which the head is self -employed or an
employer have higher saving rates. Moreover, households while pension payments
constitute a larger share of income save less and concluded that the findings of the
study show strong evidence of precautionary savings.
Tony (2008) analyzed the determinant of domestic saving in Egypt during the period
1976-2006. Using co integration and error correction methodology the results of the
study provides evidence that domestic savings in Egypt is determined by the
following factors. First the growth of per capital income is founded to have positive
influence of domestic savings, especially on the long –run. Second, budget deficit
ratio appears to have a negative effect on domestic saving ratio and that higher
government savings partially crowed out private savings and those does not provide
support of the existence of full Recardian Equivalences. Third, the development of

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financial market as per oxide by the increase in the M2/GNP ratio shows a positive
and significant effect on domestic savings. Forth, the real interest rate and inflation
rate prove to have positive and significant impact on the level of domestic savings.
Finally, current account deficit recorded a negative and statistically significant effect
on both the short run and long run, which imply that external saving may tend to act
as a substitute to domestic private saving. In USA Kim (2008) investigated the
relationship between personal saving and a number of internal and external variables
that may affect it. Using time series data which spanned 1950-2007.The author
reported that personal saving is highly depend on personal income, tax, credit
outstanding and status of employment, while dependency ratio, current real estate
loan, real interest rate, and status of economic performance are indeterminate and
conclude that the personal saving rate is more sensitive to changes in internal
variables than changes in external variables.

In the study of Nwachukwu and Egwaikhide(2007) use an error correction to

investigate the determinants of saving in Nigeria. The estimation results indicated that
the level of per capital income, terms of trade changes, public saving rate, external
debt service ratio, and the inflation rate has positive and significant influences on
domestic saving while real interest rate and growth rate of income have a negative on
saving rate. They supported the hypothesis that both the change in the rate of income
growth and the change in income level are powerful determinants of changes in the
private saving rate.
Uremadu(2007) investigated the core leading determinants of financial saving in
Nigeria using ordinary least square (OLS) econometric frame work. The results show
positive and significant influence of growth domestic product per capital, interest rate
spread, broad money supply, and debt service ratio on savings while real interest rate
and domestic inflation rate have negative influence on the level of savings.
Olayemi and Jolaosho (2013) empirically assessed the impact of real interest rate on
savings mobilization in Nigeria. The Vector-Auto Regression (VAR) was employed
using the time series data from 1980 to 2008.The author reported that real interest rate
has negatively impacted on the level of savings mobilization in Nigeria. They
concluded that there is needed for government in Nigeria to bridge the existing gap
between the lending and saving rate and increase per capital income level of the
populace, to stimulate saving for investment and economic growth and also efforts
should have geared towards reducing domestic inflation rate to arrest its negative
impact on real saving rate in Nigeria.

Haile(2013)investigated the determinants of domestic saving in Ethiopia using time

series annual data from 1970/71 -2010/11.Using an ARDL bonds tasting approach and
error correction model(ECM) to capture both short run and long run relationships.
The estimated result revealed that growth rate of income, budget deficit ratio and
inflation rate were statistically significant in short run and long run determinants of

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domestic saving. But, depositing interest rate, current account deficit ratio and
financial depth were found to be statistically insignificant determinants in the long
run. The overall findings of the study underlined the importance of raising the level of
income in a sustainable manner, minimizing the adverse impact of budget deficit and
inflation rate and creating competitive environment in the financial sector.

We can conclude from the previous literatures that the determinants of private saving
are diverse both in developed and developing countries. Most empirical studies
emphasized the significant and negative influence of government savings on the
saving rates, confirming the claim that government savings tend to crowd out private
savings. Moreover, direct positive association between GDP growth rate, GDP per
capita growth rate and private savings, indicates that these variables represent the
most important determinants of private savings.
Interest rate, inflation rate and current account deficit appear to have an ambiguous
impact on saving levels. Moreover, demographic factors such as dependency ratio and
urbanization rate seem to have a negative effect on private saving rates; however, the
significance of these variables was mixed between studies.

From the reviewed literatures, there has been no research done to investigate the
behavior of private saving in Ethiopia separately. Therefore, examining the
macroeconomic factors that determine the private savings rate in Ethiopia by
including the possible explanatory variables will provide policy makers to formulate
policies that enhance private savings rate in Ethiopia. In addition to this identifying
the direction of causality between growths and saving is important because it indicate
direction for policy makers to make decision easily.

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CHAPTER THREE

3. METHODOLOGY

3.1 METHODOLOGY AND DATA SOURCE

In general this section will try to describe the methods that are used in carrying out
this study. It explains the data sources, type, specification data description and
procedures that used to analyze the study.

3.2 DATA TYPE AND SOURCE

The study is depending on time series secondary data which will be collected from
domestic and international publications. the source of domestic secondary data is from
Ethiopian economics association (EEA)data base, national bank of Ethiopia
(NB).world bank and others relevant publications on private saving related issue is

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used as reference for the international secondary data.

3.3 DATA ANALYSIS METHODE

The method to this study is economic analysis by using time series data ran going
from 1990-2020. Because the researcher wants to show the major determinants of
private saving and trend. This analysis will be done through OLS econometrics
model
In addition, statically measures such as tables and averages will be used for the
purposes of analysis.

More over the researcher will be used STATA software program for co integration
analysis the data both descriptive and empirical analysis. Given the classical
assumption OLS estimation techniques will use. The reason for choosing Engle
Granger estimation is due to the following reason first, the parameter obtained by this
method will have some optimal property that means BLUE property of OLS (best
linear unbiased and efficient) estimation. Second, the computational prouder of OLS
is simple as compared to other estimation methods. Third, OLS is one of the most
commonly employed methods in estimation economic model (Gujarati, 2004).There
is different methodology to address the above research questions. However, our study
will be depend on augmented dicky-fullerfuller(ADF) unit root test for determining
variables order of integrations. Finally,VAR MODEL will be applied for test the
direction of casual relationship between private saving and real GDP growth rate;
because it is more suitable for analysis direction of the casual relationship os
unknown and it is also expected past values of both variable could have a significant
impact on the current values.

3.4 VARIABLE DESCRIPTION

The description of the variable entering the private saving model and the expected
result are presented as follows:
Dependent variable:
Private saving; private saving is defined as unused income of the private citizen after
paying tax and spending on consumption goods. As there is no officially published
time serious data from the national income accounts on private saving for Ethiopia,
private saving is taken as the difference between total saving and public savings.
Independent variables:
Real Gross domestic product; an increasing RGDP has a positive effect on private
saving. This is due to the fact that an increasing RGDP leads to increase an income. It
is known from economic theories as income increase the marginal propensity to
consume out additional income decreased. Thus, the higher per capita income would
save. As a result, this increase in saving makes a lot of finance to be available to
private investor.

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Age dependency ratio; it is the variable representing the dependency ratio in
Ethiopia. Several studies have examined the effects of demographic change in saving
rate. However, the definition of dependency is almost as numerous as the studies.
Some researchers looked at youth and elderly dependency separately. While others
have use an aggregate measures of dependency. Some researchers categorize active
population as those between 20 up to 64 years of age and other categorize as those
between 15 up to 64 years of age. In this study, data from the central statistical
authority (CSA) whereby the working force is categorized as those aged from 15 up to
64 years is used.
Inflation; it is rapid increase in price over months or years and mirrored in the
correspondingly decreasing purchasing power of the currency. It has its worst’s effect
on fixed wage earners, and disincentive to save (Business Dictionary). Therefore,
inflation has direct influence on private saving. So the sign that the study expect is
negative sign in the regression.
Current Account Deficit: – here current account deficit used as a proxy for external
saving. This variable is included to see whether the foreign savings act as a
compliment or substitute to private savings.

3.5 MODEL SPECIFICATION

In developing countries, saving model is difficult to include all determinants of
private saving because of unavailability of data about some determinants. For this
particular study the standard multiple regression model will employee to analysis the
determinants of private saving. The method of OLS is applied for estimating the
parameter of multiple regression models. The standard multiple linear regression
models will be select because it helps to build a better model for predicting the
dependent variable. It incorporates the general functional relationship and is most
widely used for empirical analysis (Gujarat, 2004).
The multiple linear regressions are given by the form;
Yi=β0+β1X1+β2X2+β3X3+……. +βnXn……………………… (1)
Where Yi = dependent variable
β0=constant
βi=coefficient of independent variable
Xi= independent variable
The specific economic model in this study is;
PS=f (RGDP, ADR, INF, CAD+Ei…………………. (2)
Considering this, the following explanatory variables are used, such as RGDP,
AGEDEPENDENCY RATIO, INFLATION, AND, CURRENT ACCOUNT DEFICIT

EEi = Stochastic variable at time

Having the above question, the sign of each explanatory variable with the dependent
variable (private saving) will be expected blow
v a r i a b l e e x p e c t e d s i g n

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 real growth domestic product p o s i t i v e
age dependency ratio n e g a t i v e
i n f l a t i o n n e g a t i v e
current account deficit n e g a t i v e

After we specify our model, the next step will be shows the econometric analysis as
follow;
First we will test the stationary of variables, and perform co-integration taste if
variables are non-stationary in their level and stationary in the first difference. Third,
OLS will be used to regress the model and estimate the relation be between dependent
variable (Ps) and explanatory variable.

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