Saving-Investment Connection: Evidence from the Asean Countries

By Anoruo, Emmanuel | American Economist, Spring 2001 | Go to article overview

Saving-Investment Connection: Evidence from the Asean Countries


Anoruo, Emmanuel, American Economist


Abstract

The relationship between saving and investment has been sharply debated in the literature following the pioneering work of Feldstein and Horioka (1980). This paper extends this debate to the ASEAN countries by using cointegration procedure in time-series analysis. Specifically, three analyses are conducted. First, saving and investment are tested to determine the order of integration using both the Dickey-Fuller (DF) and augmented Dickey-Fuller (ADF) approaches. Second, the long-run equilibrium relationship between saving and investment is explored by utilizing the cointegration tests proposed by Johansen and Juselius (1990). Third, Granger-causality tests based on vector error-correction models (VECM) are undertaken to ascertain the direction of causality between the two series. The results indicate that saving and investment are integrated of order one [I(1)]. Based on the cointegration results, saving and investment are found to share long-run equilibrium association. The Granger-causality tests reveal tha t investment causes saving in the cases of Indonesia and Singapore. For the Philippines, causality runs from saving to investment. As for Malaysia and Thailand, the results suggest bi-directional causality between saving and investment.

1. INTRODUCTION

The theoretical finding by Feldstein and Horioka (1980) that saving and investment are highly correlated has generated intense debate in the economics literature. Feldstein and Horioka interpreted the high correlation between saving and investment as evidence of imperfect capital mobility across national boundaries. This finding is inconsistent with the conventional wisdom, which stipulates that in the absence of financial controls, capital should flow between countries in search of the highest rate of return. However, if capital movements were restricted, domestic saving and investment will be highly correlated. The existence of strong association between saving and investment has been validated by Feldstein (1983), Summers (1988), Baxter and Crucini (1993), Dooley, Frankel, and Mathieson (1987), Caprio and Howard (1984), Feldstein and Bacchetta (1989), Miller (1988), and Tesar (1991). In general, these studies contend that capital is not internationally mobile. Under this assumption, increases in domestic saving, all things being equal, will stimulate domestic investment since capital is not flowing across country borders in search of the highest return.

However a number of researchers including Murphy (1984), Obstfeld (1986), Finn (1990), Stockman and Tesar (1991), and Barkoulas, Filizetkin, and Murphy (1996) have challenged the existence of high correlation between saving and investment. These authors surmise that capital is internationally mobile. Under this hypothesis, foreign capital flows to countries with higher real interest rates. Perfect capital mobility, has important policy implications especially for small open economies. In the event that capital were internationally perfectly mobile, increases in domestic saving do not necessarily translate into higher domestic investment because foreign savings generally flow to countries with higher real interest rates.

Although the previous studies in the literature have furnished insights with regard to the relationship between saving and investment, the conceptual and methodological approaches utilized in these studies present a number of concerns. First, most of the studies used single equation ordinary least squares (OLS) regression method to examine the relationship between saving and investment. These studies are likely to suffer from simultaneous equation bias leading to fallacious conclusions. Second, studies that employed OLS regression analysis did so without first examining the time series properties (unit roots) of saving and investment. Nelson and Plosser (1982) have shown that most macroeconomic time series data are nonstationary in their levels but stationary when differenced. …

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