Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach

Solomon Kebede Menza

doi:doi:10.11648/j.ijtam.20190506.12

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Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach

Solomon Kebede Menza

Published in International Journal of Theoretical and Applied Mathematics (Volume 5, Issue 6)

Received: 19 August 2019 Accepted: 26 September 2019 Published: 27 November 2019

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Abstract

This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vector error correction model (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the error correction term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.

Published in	International Journal of Theoretical and Applied Mathematics (Volume 5, Issue 6)
DOI	10.11648/j.ijtam.20190506.12
Page(s)	83-93
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Annual Deposit, Vector Error Correction Model, Commercial Bank of Ethiopia

References

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[2]	Dereje Hailemariam Amene (2017). Determinants of Deposit in Ethiopian Private Commercial Banks, Addis Ababa University.
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[5]	Mohammad, N., and Mahdi, S. (2010). The Role of Inflation in Financial Repression: Evidence from Iran World Applied Sciences Journal, 6 (1818-4952), 653-661.
[6]	Word Bank Group, (2011). SME Finance in Ethiopia: addressing the missing middle challenge 94365.
[7]	Abay (2010) “Domestic Resource Mobilization in Sub-Saharan Africa” The Case of Ethiopia by, University of Addis Ababa, Ethiopia.
[8]	Franklin A., Otchere I., and Senbet L. (2011). African financial system: a review: a Review of Development Finance, Vol. 1 No. 2, 79-113.
[9]	Mahdi Salehi (2008). ‘Corporate Governance and Audit Independence: Empirical Evidence of Iranian Banks’ International Journal of Business Management, Vol. 3 No. 12, 44-51.
[10]	Kelvin A. (2001). The Role Of Commercial Banks In Financing Growth And Economic Development In Trinidad And Tobago And The Caribbeans: a perspective from the Royal bank of Trinidad and Tobago, central bank of Belize.
[11]	HIBRET B. (2015). Determinate of commercial Bank’s deposit growth in Ethiopia: case study on the commercial Bank, Addis Ababa University, retrieved from http://etd.aau.edu.et/bitstream/handle/123456789/13540/Hibret%20Belay%20.pdf?sequence=1&isAllowed=y.
[12]	Alemayehu G. (2015).’Will the Government of Ethiopia’s policy of saving mobilization be successful? The lesson from the African Evidence. Mudaye Neway, Vol. 5 No. 2.
[13]	Wubetu Elias Gemedu (2012). Factors Determining Commercial Bank Deposit: An Empirical Study on Commercial Bank of Ethiopia, Addis Ababa University.
[14]	Tizita Gebeyehu Yismaw (2014), Determinants of Private Saving In Ethiopia, Maters Theses Arbaminch University.
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[18]	Engle R. F. and Granger C. W. J. (1987). Econometrica, Vol. 55 No. 2., 251-276.
[19]	M. Friedman and Michael Woodford (2011). “The Optimal Rate of Inflation,” in Handbook of Monetary Economics edited by Benjamin, Elsevier, San Diego CA, Vol. 3, No. B, 653-722.
[20]	Lomuto, J. K. (2008). Determinants of Kenyan Commercial Banks Deposit Growth. University of Nairobi, retrieved from http://erepository.uonbi.ac.ke/bitstream/handle/11295/17109/Lomuto%20Joel%20K_Determinants%20of%20Kenyan%20Commercial%20Banks%20Deposits%20Growth.pdf?sequence=3.
[21]	Nathanael E. O (2014). Determinants of Bank Deposits in Nigeria Under Constraints of Portfolio Selection, being the text of a conference paper presented in the Nigerian Sociological Society Conference at the Delta State University, Abraka.
[22]	Otu Larbi-Siaw and Peter Angmor Lawer (2015). Determinants of Bank Deposits in Ghana: A Cointegration Approcah. Asian Journal of Economics and Empirical Research, 2 (2409-2622), 1-7.
[23]	M. Friedman and Michael Woodford (2011). “The Optimal Rate of Inflation,” in Handbook of Monetary Economics edited by Benjamin, Volume 3B, Elsevier, San Diego CA, 2011, 653-722.
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APA Style

Solomon Kebede Menza. (2019). Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. International Journal of Theoretical and Applied Mathematics, 5(6), 83-93. https://doi.org/10.11648/j.ijtam.20190506.12

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ACS Style

Solomon Kebede Menza. Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. Int. J. Theor. Appl. Math. 2019, 5(6), 83-93. doi: 10.11648/j.ijtam.20190506.12

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AMA Style

Solomon Kebede Menza. Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. Int J Theor Appl Math. 2019;5(6):83-93. doi: 10.11648/j.ijtam.20190506.12

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@article{10.11648/j.ijtam.20190506.12,
  author = {Solomon Kebede Menza},
  title = {Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach},
  journal = {International Journal of Theoretical and Applied Mathematics},
  volume = {5},
  number = {6},
  pages = {83-93},
  doi = {10.11648/j.ijtam.20190506.12},
  url = {https://doi.org/10.11648/j.ijtam.20190506.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijtam.20190506.12},
  abstract = {This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vector error correction model (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the error correction term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.},
 year = {2019}
}

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TY  - JOUR
T1  - Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach
AU  - Solomon Kebede Menza
Y1  - 2019/11/27
PY  - 2019
N1  - https://doi.org/10.11648/j.ijtam.20190506.12
DO  - 10.11648/j.ijtam.20190506.12
T2  - International Journal of Theoretical and Applied Mathematics
JF  - International Journal of Theoretical and Applied Mathematics
JO  - International Journal of Theoretical and Applied Mathematics
SP  - 83
EP  - 93
PB  - Science Publishing Group
SN  - 2575-5080
UR  - https://doi.org/10.11648/j.ijtam.20190506.12
AB  - This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vector error correction model (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the error correction term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.
VL  - 5
IS  - 6
ER  -

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Author Information

Solomon Kebede Menza

Economics Department, Wolaita Sodo University, Wolaita Sodo, Ethiopia

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Solomon Kebede Menza. (2019). Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. International Journal of Theoretical and Applied Mathematics, 5(6), 83-93. https://doi.org/10.11648/j.ijtam.20190506.12

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ACS Style

Solomon Kebede Menza. Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. Int. J. Theor. Appl. Math. 2019, 5(6), 83-93. doi: 10.11648/j.ijtam.20190506.12

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AMA Style

Solomon Kebede Menza. Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach. Int J Theor Appl Math. 2019;5(6):83-93. doi: 10.11648/j.ijtam.20190506.12

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@article{10.11648/j.ijtam.20190506.12,
  author = {Solomon Kebede Menza},
  title = {Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach},
  journal = {International Journal of Theoretical and Applied Mathematics},
  volume = {5},
  number = {6},
  pages = {83-93},
  doi = {10.11648/j.ijtam.20190506.12},
  url = {https://doi.org/10.11648/j.ijtam.20190506.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijtam.20190506.12},
  abstract = {This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vector error correction model (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the error correction term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - Empirical Analysis of Long-run and Short-run Dynamic Effects of Deposit Rate, Inflation Rate and GDP on Bank Deposit: Vector Error Correction Model Approach
AU  - Solomon Kebede Menza
Y1  - 2019/11/27
PY  - 2019
N1  - https://doi.org/10.11648/j.ijtam.20190506.12
DO  - 10.11648/j.ijtam.20190506.12
T2  - International Journal of Theoretical and Applied Mathematics
JF  - International Journal of Theoretical and Applied Mathematics
JO  - International Journal of Theoretical and Applied Mathematics
SP  - 83
EP  - 93
PB  - Science Publishing Group
SN  - 2575-5080
UR  - https://doi.org/10.11648/j.ijtam.20190506.12
AB  - This paper empirically examines the long-run and short run dynamic effects of deposit rate (r), inflation rate (π) and GDP on bank deposit. The study targeted commercial bank of Ethiopia (CBE) because it has been taking a lion’s share in terms of deposit amount which in turn plays a vital role in deposit refunding for investors. To show the long-run and short run dynamic effects of r, π and GDP on the deposit amount of CBE we took 30 years data from the year 1988 to 2017 from MOFED, CSA, National bank of Ethiopia and CBE data sets. To achieve the objectives vector error correction model (VECM) was used after checking the possible assumptions of our economic series. The results of ADF test statistics confirms our economic series are stationary at their first difference. This indicates that the variables are integrated of order one, I (1). Johansen’s co-integration test suggests one co-integrating relationship between the variables. According to our findings, the coefficient of the error correction term for CBE deposit is statistically significant, and the speed of convergence to equilibrium of approximately 16 percent. Hence, in the short run, deposits are adjusted by 16 percent of the past year’s deviation from equilibrium. The joint effect result indicates that except deposit rate all included variables have no significant short-run effect on deposit amount. More specifically, the result of Johansen normalization restriction shows in the long-run on average inflation rate and GDP have a negative effect on deposit, while deposit rate has a positive effect on the total amount of deposit held by CBE, among other findings. Finally, the government and other concerned bodies should take necessary steps to mobilize deposit in CBE.
VL  - 5
IS  - 6
ER  -

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