IIMS Journal of Management Science

Saving and Investment Relationship in India: A Vector Error Correction Modelling

P K Mishra¹

First Published 1 Jun 2022. https://doi.org/10.1177/ims.2011.2.2.142

Article Information

Volume 2, Issue 2 July-December, 2011

¹P K Mishra, Ph.D is currently Assistant Professor of Applied Economics at Siksha O Anusandhan University, Bhubaneswar, and Orissa, India. He has published more than 40 research papers in several indexed and referred journals. He has been working as the member of editorial advisory board of Interdisciplinary Studies Journal, Finland and reviewer of African Journal of Business Management, Journal of Development and Agricultural Economics, and International Research Journal of Management and Business Studies. He has authored 9 text and reference books at the national level. He can be reached at pkmishra1974@gmail.com

Abstract

The study of the relationship between saving and investment has a wide relevance for developed as well as developing nations. Economists often claim that higher savings contribute to increased investment and growth of Gross Domestic Product in an economy and thus, savings and investment are key factors for the sustainable development of a country. So, the objective of this paper is to investigate the relationship between savings and investment in the context of the Indian economy over the period 1950-51 to 2008-09. The use of the annual data in their natural logarithms in co integration test provides the evidence of existence of long-run equilibrium relationship between saving and investment. And, the vector error correction modelling suggests that there exists long-run unidirectional causality between the variables running from saving to investment. The Granger causality test supports the existence of short-run unidirectional causality running in the same direction too. This result disproves the classical theory, and establishes the Keynes view on saving-investment relationship. In addition, since higher economic growth warrants a balance between savings and investment, the policy makers should bring a trade off between monetary and fiscal policies.

Keywords

Savings, Investment, Co- integration, VECM, Granger Causality

JEL CLASSIFICATION: C32, E21, E22

References

Ang (2009). “The Saving-Investment Dynamics and Financial Sector Reforms in India”, MPRA Paper No. 14498, Retrieved from http://mpra.ub.uni-muenchen.de/14498/.

Apergis, N. and Tsoulfidis, L. (1997). “The Relationship between Saving and Finance: Theory and Evidence from E.U. Countries”, Research in Economics, Vol 51, pp. 333–358.

Arginon, I. and Roldan, J. (1994). “Saving, Investment and International Capital Mobility in E.C. Countries”, European Economic Review, Vol.38, pp. 59–67.

Bacha, E.L. (1990). “A Three Gap Model of Foreign Transfers and the GDP growth Rate in Developing Countries”, Journal of Development Economics, Vol.32, pp. 279-96.

Barro, R. J. (1990). “Government Spending in a Simple Model of Endogenous Growth”, Journal of Political Economy, Vol.98, pp. S103-S125.

Bayoumi, T. (1990). “Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behaviour? International Monetary Fund Staff Papers, Vol..37, pp. 360–387.

Chinn, M.D. and Ito, H. (2007). “Current Account Balances, Financial Development and Institutions: Assaying the World Savings Glut”.Journal of International Money and Finance, Vol. 26, pp. 546-569.

Coakley, J., Hasan, F. and Smith, R. (1999). “Saving, Investment, and Capital Mobility in LDCs”, Review of International Economics,Vol. 7, pp. 632–640.

Corbin, A. (2001). “Country Specific Effects in the Feldstein-Horioka Paradox: A Panel Data Analysis”, Economics Letters, Vol.72, pp. 297-302.

De Haan, J. and Siermann, C. L. J. (1994). “Saving Investment and Capital Mobility: A Comment on Leachman”, Open Economies Review, Vol.5, pp. 5-17.

De Vita, G. and A. Abott (2002): “Are Saving and Investment Cointegrated? An ARDL Bounds Testing Approach”, Economics Letters, 77(2), 293-299.

Dickey, D.A. and W.A. Fuller (1979). “Distribution of the Estimators for Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Association, Vol.74, pp. 427–431.

Domar, E.D. (1946). “Capital Expansion, Rate of Growth, and Employment,” Econometrica, Vol. 14, pp. 137-147.

Dooley, M.P., Frankel, J. and Mathieson, D.J. (1987). “International Capital Mobility: What Do Saving-Investment Correlations Tell Us?” International Monetary Fund Staff Papers, Vol34, pp. 503-530.

Engle, R. F. and C. W. J. Granger (1987). “Co-integration and Error Correction: Representation Estimation, and Testing”, Econometrica, Vol.55(2): pp. 251-276.

Frankel, J., Dooley, M. and Mathieson, D. (1986). “International Capital Mobility in Developing Countries vs. Industrial Countries: What Do Savings Investment Correlations Tell Us”, NBER Working Paper -2043.

Feldstein, M. (1983). “Domestic Saving and International Capital Movements in the Long Run and the Short Run”, European Economic Review,Vol. 21, pp. 129-151.

Feldstein, M. and Horioka, C. (1980). “Domestic Saving and International Capital Flows”, Economic Journal, Vol.90, pp. 314-329.

Ghosh, A. and Ostry, J. (1995). “The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach”, World Bank Economic Review, Vol.9, pp. 305–33.

Granger, C. W. J. (1988). “Some Recent Developments in the Concept of Causality”, Journal of Econometrics, Vol.39, pp. 199-211.

Harrod, R. (1939). “An Essay in Dynamic Theory,” Economic Journal, Vol.49, pp. 14-33.

Hendry, D. F. (1986): “Econometric Modelling with Cointegrated Variables: An Overview”, Oxford Bulletin of Economics and Statistics, vol.48, pp.201-212

Jansen J. (1996). “Estimating Saving-Investment Correlations: Evidence for OECD Countries Based on an Error Correction Model”, Journal of International Money and Finance, Vol.15(5) pp. 749-781.

Jansen, W.J. (1998). “Interpreting Saving-Investment Correlations,” Open Economies Review, Vol. 9, pp.205-217

Jappelli, T and M. Pagano (1994). “Savings, Growth and Liquidity Constraints”, Quarterly Journal of Economics, Vol. 109: pp. 83-109.

Johansen, S. (1988). “Statistical Analysis of Cointegrating Vectors”, Journal of Economic Dynamics and Control, Vol.12, pp. 231-254.

Johansen, S. (1991). “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models”; Econometrica, Vol.59(6), pp. 1551-80

Kasuga H. (2004). “Saving-Investment Correlations in Developing Countries,” Economics Letters, Vol.83(3), pp. 371-376.

Krol, R. (1996). “International Capital Mobility: Evidence from Panel Data”, Journal of International Money and Finance, Vol.15 ( 3), pp. 467-474.

Leachman, L.L. (1991): “Saving, Investment and Capital Mobility among OECD Countries”, Open Economies Review, 2, pp. 137–163.

Levy, Daniel (1998): “Is the Feldstein-Horioka Puzzle Really a Puzzle?” Emory University Working Paper, Department of Economics, EU, Atlanta

Levy, D. (2000) “Investment-Savings Co-movement and Capital Mobility: Evidence from Century Long U.S. Time Series”, Review of Economic Dynamics, Vol.2, pp. 100-136.

Lewis, W.A. (1954). “Economic Development with Unlimited Supplies of Labour”, The Manchester School,Vol. 22, pp. 139-191.

Lucas, R. (1988). “On the Mechanics of Economic Development”, Journal of Monetary Economics, Vol.22: pp. 3-42.

Maddala, G.S (2001). Introduction to Econometrics, 3rd Edition, Wiley and Sons, Inc.

Mamingi, N. (1997): “Savings-Investment Correlations and Capital Mobility: The Experience of Developing Countries”, Journal of Policy Modeling, Vol.19, pp.605-626

Miller, S. (1988). “Are Saving and Investment Cointegrated? Economic Letters, Vol. 27, pp. 31–34.

Narayan, P.K. (2005). “The Saving and Investment Nexus for China: Evidence from Cointegration Tests, Applied Economics, Vol.37(17), pp. 1979-1990.

Obstfeld, M. (1986). “Capital Mobility in the World Economy: Theory and Measurement.” Carnegie-Rochester Conference Series on Public Policy,Vol. 24, pp. 55-103.

Payne, J. E. (2005). “Savings-Investment Dynamics in Mexico”, Journal of Policy Modeling, Vol. 27, pp. 525-534.

Pelagidis, T. and Mastroyiannis, T. (2003). “The Saving-Investment Correlation in Greece, 1960-1997: Implications for Capital Mobility”, Journal of Policy Modelling,Vol. 25, pp. 609-616.

Penati, A. and Dooley, M. (1984). “Current Account Imbalances and Capital Formation in Industrial Countries, 1949-81.” International Monetary Fund Staff Papers, Vol. 31, pp. 1-24.

Romer, P. (1986). “Increasing Returns and Long-Run Growth”, Journal of Political Economy, Vol. 94, pp. 1002-1037.

Romer, P.M. (1990). “Endogenous Technological Change”, Journal of Political Economy, Vol.98: S71-S102.

Saggar, M. (2003). “A Perspective on Saving, Investment and Macroeconomic Policies in India in the 1990s’, in Jha, R. (ed.), The Indian Economic Reforms, Sydney: Palgrave Macmillian, pp. 92-117.

Seshaiah, V. and V. Sriyval (2005). “Savings and Investment in India: A Cointegration Approach”, Applied Economics and International Development, Vol. 5: pp. 25-44.

Sinha, D. (2002). “Saving-Investment Relationships for Japan and other Asian countries”, Japan and the World Economy, Vol.14, pp. 1-23.

Sinha, T. and Sinha, D. (2004). “The Mother of All Puzzles Would Not Go Away”, Economic Letters,Vol. 82, pp. 259-267.

Solow, R.M. (1956). “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, Vol.70, pp. 65-94.

Solow, R. (1970). Growth Theory: An Exposition, Oxford: Clarendon Press.

Taylor, A. M.(1996). “International Capital Mobility in History: The Saving-Investment Relationship”, NBER Working Paper 5743.

Verma, R. (2007). “Savings, Investment and Growth in India: An Application of the ARDL Bounds Testing Approach”, Faculty of Commerce Papers, University of Wollongong, Australia, http://ro.uow.edu.au/commpapers/453

Wahid, Salahuddin, Noman (2008). “Saving Investment Correlation in South Asia- A Panel Approach”, European Journal of Economics, Finance and Administrative Sciences, Vol.11, pp.153-159.