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

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, and 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 confirm 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.

Keywords: Annual Deposit, Vector Error Correction Model, Commercial Bank of Ethiopia.