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The relation between savings and growth: cointegration and causality evidence from Asia

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  • Pradeep Agrawal

Abstract

The direction of causality between savings and growth remains unclear even though it is of critical importance for development policy. In this paper, Granger causality analysis is undertaken for seven Asian countries using the VECM (Engle and Granger) and VAR procedures. We find that in most cases, the direction of causality runs primarily from growth (or income) to savings, although in some countries, there is also evidence of a feedback effect from savings to income and growth. Thus, development policy should focus less on promoting high savings rates and more on promoting high growth rates. Estimation of the savings functions are presented using Engle and Granger's Static OLS and Stock and Watson's dynamic OLS (DOLS) procedures where appropriate. The high savings rates in Asia are found to be due to the high rate of growth of income per capita, declining shares of dependent population, and some special institutional features, such as the high central provident fund rates in Singapore. Interest rates are found to have little impact on savings.

Suggested Citation

  • Pradeep Agrawal, 2001. "The relation between savings and growth: cointegration and causality evidence from Asia," Applied Economics, Taylor & Francis Journals, vol. 33(4), pages 499-513.
    • Handle: RePEc:taf:applec:v:33:y:2001:i:4:p:499-513
    DOI: 10.1080/00036840122210
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    1. Banerjee, Anindya & Dolado, Juan José & Mestre, Ricardo, 1997. "ECM tests for cointegration in a single equation framework," DES - Working Papers. Statistics and Econometrics. WS 10607, Universidad Carlos III de Madrid. Departamento de Estadística.
    2. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, Decembrie.
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