During the process of economic development, accelerated economic growth can be achieved by increasing the savings rate. The causality between domestic savings and domestic investment is a crucial factor in this question, because national savings are the main resource for domestic investment, especially in a closed economy.
The purpose of this paper is to employ a cointegration, error-correction model (ECM) and Granger causality to examine whether causality between domestic savings and investment was in evidence in APEC member nations from 1960 to 1993.
According to our empirical results, Chile, South Korea, Malaysia, Thailand, and the United States showed evidence of two-way causality, that is, that domestic savings and domestic investment are mutually related, and that policies designed to either increase rise domestic savings or to stimulate domestic investment feedback on each other. For New Zealand, Hong Kong, Taiwan, Indonesia, Mexico, and Papua New Guinea, meanwhile, the empirical results show a one-way causality, that is, that higher domestic investment leads to higher domestic savings; however, domestic savings did not feedback on investment.
In China, however, the empirical results show an opposite trend. It’s domestic investment causes increased domestic savings, but saving does not affect investment. There was found to be no causality relationship in other countries, namely Australia, Canada, Japan, Singapore, and the Philippines. This means that domestic savings and domestic investment operate independently of each other.
The analytical framework developed in this study can be utilized in studies using more detailed data such that the extent of the investment (or saving) differential in specific groups of countries can be assessed. The differentials can be clarified further through the same analytical framework.
