Causal relationship between domestic savings and economic growth

causal relationship between domestic savings and economic growth

This paper addresses the relationship between domestic savings and economic growth for various economies with different income levels. of causal relationship between gross domestic product and gross domestic indicates a positive relationship between domestic savings and economic growth . was to investigate the causality relationship between the domestic saving and Causal Relationship between savings and economic growth in countries.

causal relationship between domestic savings and economic growth

As indicated in Table 4the coefficient of gross domestic savings is 0. This implies that in the long run, an increase in gross domestic savings contributes positively in realization of economic growth. This maybe so, as the estimated result indicates long term postponement of the present consumption into the future, which means capital accumulation for meaningful investment leading to a rise in economic growth.

causal relationship between domestic savings and economic growth

This confirms the validity of the Solow [1] growth model in Ghana. The result also concurs with empirical studies by Aghion et al. The elasticity of the consumer price index has a positive sign of 0.

This means that a proportionate increase in the general price level will grow the economy less than proportionately in the long run.

This is due to the fact that an increase in general price level reduces real money balance and worth of people. Individuals then diversify their Table 4. VECM long-run estimation results. This phenomenon drives down interest rate and propels greater capital accumulation to spark a faster output growth. The finding confirms the studies conducted by Oleka et al.

As evident from the results, the degree of trade liberalisation which is proxied by trade openness has a positive and statistically significant effect on economic growth in Ghana. The positive coefficient implies that a proportionate allowance of trade liberalisation uplifts the economic fortunes by 0.

The finding contradicts the conventional views that trade openness leads to faster growth of imports than exports and its serious implication on balance of trade and economic growth.

In addition, the finding suggests that trade openness promotes efficient resource allocation and market expansion so per unit cost of output falls to make the economy more competitive.

Besides, foreign exchange from exports and cross-border import tariffs and other benefits emanating from trade openness exceeds its related problems in the economy. The finding is consistent with the studies conducted by Mwaba [47]Yanikkaya [48]Shaheen et al. With a coefficient of 0. The technological diffusion is also associated with positive spillover effect in the form of development of sales network and managerial training to local employees and production of higher quality products and competition effect on the domestic firm.

The results for the short run dynamics are displayed in Table 5. The coefficient of the error correction term also shows the speed with which any shock to the dependent variable in the model is corrected.

The negative sign of the error correction term suggests that it is effective for the adjustment process of the system to restore to equilibrium. The low coefficient of the adjustment matrix shows Table 5. VECM short-run dynamic results.

causal relationship between domestic savings and economic growth

The dependent variable has three lags used as independent variables. The second and the third lags have unexpected negative sign, although not significant.

causal relationship between domestic savings and economic growth

This is not consistent with economic theory. The statistical insignificance of the second and third lag coefficients of the dependent variable used as independent implies that current growth in GDP is not respectively affected by its values two and three years ago.

With respect to the short run estimates, the coefficient of savings implies that gross domestic savings have negative but insignificant influence on economic growth in the short run since all the lagged variables are insignificant. The negative and lower value suggest that if everyone tries to save an increasing larger portion of income, it triggers economic down turn since the savers will be poorer instead of becoming richer. This is because the economy will slow down from reduction in demand and due to that the same people will be cyclically unemployed.

causal relationship between domestic savings and economic growth

Therefore, increased savings represent a diminishing circular flow of income. This confirms that the paradox of thrift works for Ghana in the short run. At the first lag, the coefficient of FDI is positive but statistically insignificant. Since FDI measures international capital flow, the high positive and elastic coefficient implies a high degree of international capital flow in Ghana.

This is not surprising due to the positive spillover effect of FDI in the form of forward and backward linkages and technical training FDI brings in the hosting economy.


This compliments domestic savings to finance economic growth in the model. It also implies that history of FDI two years ago has more than proportionate impact on current growth of the economy. The results obtained from the study show that three-year old history of trade openness in the economy does not have any significant impact on the current growth of the economy.

This also suggests that trade liberalisation in Ghana has a negative influence on the growth of the economy in the short run but not significant. This means that current growth rate of GDP is negatively influenced by two-year past value of inflation. Since inflation rate shows how uncertain the investment climate looks to potential investors and general instability the economy is, the negative relationship implies that high previous years inflation rate sends decisive signals to the economy in question that has a two-year-old history of uncertainty and macroeconomic instability.

This information has a progressive tendency to reduce the volumes of current investment and hence economic growth.

Office Hours: The Solow Model: Investments vs. Ideas

Therefore, the current study investigates the possibility of saving led growth and growth driven saving in detail using Granger causality test for testing the causality the logarithms of saving and logarithms of GDP in India.

Data source and Methodology. In this study annual data is used from to The data is analyzed to determine the causality between Growth and Saving. Before analyzing the causal relationship between Growth and saving, data has been transformed in to natural logarithms, and then possible existence of unit roots in the data is examined. The stationarity1 of each series is investigated by employing Augmented Dickey-Fuller unit root test2. The number of lagged differences included is determined by the Schwarz Information Criterion3 and Akaike Information criteria4.

Further proceed with the VAR lag order selection criteria to choose the best lag length for the VAR time series model to examine the Granger causality and the pair wise Granger Causality test for all the series is performed. The Unit Root test is a widely used test. Intercept and Trend coefficient is not statistically significant Result: Here Intercept coefficient is not significant and intercept with trend coefficient taken together are statistically significant but ADF statistic is not significant.

Therefore, it may conclude that the Log GDP series level is not stationary. The log GDP series second difference does not have a unit root problem but intercept coefficient as well as intercept and trend coefficient both are not significant suggest that the Log GDP First difference with intercept and trend series is found stationary.

B Stationarity of Log Savings series: Therefore, it may conclude that the Log GDS series level is not stationary. The log GDS series second difference does not have a unit root problem but intercept coefficient as well as intercept and trend coefficient both are not significant suggest that the Log GDS First difference with intercept and trend series is found stationary.

The number of lagged terms introduced in the causality test is estimated using five different criteria viz. Final prediction error 3 AIC: Hannan- Quinn information criterion. This paper investigates the causal relationship between economic growth and saving for India using data for to From the above study it can be concluded that the Augmendented Dickey Fuller unit root tests show that GDP and Saving series become stationary when first difference are considered with including Intercept with trend.

Granger causality show that there is no causality link, one-way or two-way, between GDP and Saving may be the reason of structural break in the data. A stochastic process whose probability distribution is unchanged by shifts in time is said to be stationary. The mean and variances are constant over time and the value of the covariance between the two time periods depends only on the distance or lag between two time periods and not the actual time at which the covariance is computed.

An augmented Dickey-Fuller test is a test for a unit root in a time series sample. An augmented Dickey-Fuller test is a version of the Dickey-Fuller Test for a larger and more complicated set of time series models. The more negative it is, the stronger the rejection of the hypothesis that there is a unit roots at some level of confidence.

For example, you can choose the length of a lag distribution by choosing the specification with the lowest value of the AIC 4.