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The wide range of controversies surrounding the direction of causality between savings and economic growth necessitated this study. The study was intended to investigate the relationship between gross domestic savings and economic growth in Ghana; with the specific objective of finding whether there exists a long run relationship between them , and it was also intended to ascertain the direction of causality between the two running actors in the study over the period of 1972 to 2013. The study employed Johansen cointegration test to reveal no long run relationship between gross domestic savings and economic growth in Ghana. This necessitated the usage of the VAR technique to estimate the short run relationships. The finding was that there exists a unidirectional line of causation running f ro m gross domestic savings to economic growth in Ghana. It is strongly recommended therefore that the Bank of Ghana will use the monetary policy instruments to influence and advi s e the commercial banks on the need to p e g the deposit rate relatively higher at least equal or little above the existing interest rate. This is because the deposit rate is the opportunity cost of money demand for other purposes.

The dynamic relationship between savings and economic growth among developing economies continues to receive significant empirical attention in the ever growing literature. The role of savings in capital accumulation in realizing growth in output per capita was highlighted in the Solow-Swan [

In fact, economic theories and empirical studies having established the line of causation between savings and economic growth, the question about this causality is, to what degree? The questions about the degree of responsiveness of economic growth as a result of an increase in gross domestic savings and how significant it is, still beg for empirical answers. According to Ogoe [

With the intention of providing answers to these mind-boggling questions of the degree of responsiveness of economic growth to changes in gross domestic savings, this paper seeks to determine whether there exists a long run relationship between gross domestic savings and economic growth. Finally, this paper attempts to examine the direction of causation between gross domestic savings and economic growth in Ghana.

Generally speaking, the empirical literature on examining the relationship between savings and economic growth yield inconclusive evidence. On one hand, savings cause economic growth and the other hand, the reverse is true. Empirical works that are closest to the study with respect to the issue of causality and methodology have been discussed. These empirical verifications are mostly dependent on the macroeconomic settings and foundations of those countries in which the study are done.

Deaton and Paxson [

Mohan [

With the aid of a time series quarterly data in Pakistan, Sajid and Sarfraz [

A similar study by Khan and Shahbaz [

In China, Lean and Song [

The nexus between economic growth and domestic savings literature on Ghana is limited despite the growing interest of researchers and policymakers in the subject. Ogoe [

Johansen cointegration technique and the Granger causality test were employed by Abu [

In addition, Bankole and Fatai [

On the other hand, Adeleke [

Alomar [

In the case of South Africa, Odhiambo [

Sothan [

The relationship between savings and economic growth has been modeled in many empirical research works (see Sinha and Sinha [

GDS t = α 0 + α 1 GDP t . (1)

The study transformed Equation (1) into logarithmic form to overcome the possibility of the problem of heteroskedasticity in the residual of the estimated model. Therefore, Keynesian model is econometrically specified as;

ln GDS t = α 0 + α 1 ln GDP t + μ t . (2)

On the contrary, Solow [

ln GDP t = β 0 + β 1 ln GDS t + ε t . (3)

where α 0 and β 0 constants, and α 1 and β 1 represent the slope coefficients and the degree of responsiveness of savings to economic growth and that of economic growth to savings respectively. μ t and ε t are the stochastic disturbers in the respective equations.

Gross domestic product (GDP) is the sum of all gross value added by all resident producers in the economy plus any product taxes minus subsidies not included in the value of the product. It is calculated without making deduction for depreciation of fabricated asset or depletion and degradation of natural resources. Economic growth is proxied by Gross domestic product at constant local currency unit. The data on economic growth were sourced from the World Development Indicators [

Domestic savings include private and government savings. It is calculated as GDP less final consumption expenditure. Savings is proxied as gross domestic savings at current local currency unit. The data on domestic savings were extracted from the World Development Indicators [

After using Dickey-Fuller General Least Squares (DF-GLS) and Phillips-Perron (PP) tests to check the stationarity properties of the variables of interest, the study employed Johansen cointegration test to determine the long run equilibrium relationship gross domestic savings and economic growth. Johansen [

ℶ trace = − T ∑ i = r + 1 n log ( 1 − ℶ i ) r = 0 , 1 , 2 ⋯ n − 1 (4)

T = numberofobservations

ℶ i = the i t h Eigenvalue .

The maximum eigenvalue statistics is determined using the following formula:

ℶ max = − T log ( 1 − ℶ r + 1 ) r = 0 , 1 , 2 ⋯ n − 2 , n − 1 . (5)

The trace and maximum Eigen value statistics are compared with the critical values tabulated in Osterwald-Lenum [

If cointegration test reveals that variables are not cointegrated, the short run relationship between gross domestic savings and economic growth is determined with the aid of Granger causality procedure based on the Vector Autoregressive (VAR) model (Adebiyi [

Δ ln GDP t = α 0 + ∑ i = 1 r α 1 i Δ ln GDP t − i + ∑ j = 1 r α 2 j Δ ln GDS t − j + μ t (6)

Δ ln GDS t = β 0 + ∑ i = 1 s β 1 i ln GDP t − i + ∑ j = 1 s β 2 j Δ ln GDS t − j + ε t (7)

where μ t and ε t are stochastic error terms, r, and s denote the operational lag lengths determined by the Akaike Information and Schwartz-Bayesian criterion, Δ represents the difference operator, Δ ln GDP t is the growth rate of GDP (defined as a change in the natural logarithm of GDP in period t). Δ ln GDS t is the growth rate of gross domestic savings (defined as a change in the natural logarithm of GDS in period t). α 1 i and β 1 i are the coefficients of GDP in Equations (6) and (7) respectively. α 2 i and β 2 i are the coefficients of gross domestic savings in the same Equations (6) and (7) above respectively.

As a robust check to the Vector Autoregressive (VAR) model with regards to gross domestic savings and economic growth, the pairwise Granger causality test was conducted to buttress or refute the results of any of the models. The pairwise Granger causality test examined a null hypothesis of no causal relationship between gross domestic savings and economic growth as against an alternative hypothesis of the existence of a causal relationship between gross domestic savings and economic growth.

The unit root test results are showed in

Variable | DF-GLS Test | Phillips-Perron Test | IO | ||
---|---|---|---|---|---|

Level | Level | ||||

No Trend | Trend | No Trend | Trend | ||

lnGDP | 0.828 | −0.633 | 3.681 | −0.396 | |

lnGDS | 2.001 | −2.865 | 0.360 | −4.596 | |

Variable | DF-GLS Test | Phillips-Perron Test | IO | ||

First Difference | First Difference | ||||

No Trend | Trend | No Trend | Trend | ||

ΔlnGDP | −2.561** | −3.310** | −4.127*** | −5.884*** | I (1) |

ΔlnGDS | −3.926*** | −5.112*** | −10.677*** | −10.715*** | I (1) |

Note: ***, ** denote rejection of null hypothesis of 1% and 5% significance levels respectively. Δ is the first difference operator.

The DF-GLS test results showed that economic growth and gross domestic savings were non-stationary at their levels when trended and not trended. These results were confirmed by the Phillips-Perron (PP) test results. Thus, the null hypothesis of non-stationarity of variables at their log levels cannot be rejected at the respective level of significance. This also suggests that the variables have unit roots at their level data proposing that the variables in question are non-stationary and as such any shock to those variables will not return to equilibrium. In the presence of unit root, the data need to be differenced to avoid misspecification in the causality test. The asymptotic distribution of the Granger causality test statistics is non-standard with non-stationarity (Mohan [

The Johansen cointegration test was employed to examine the long run relationship between gross domestic savings and economic growth.

From the cointegration test results in

Unrestricted Cointegration Rank Test (Trace) | ||
---|---|---|

Hypothesized No. of CE (s) | Trace Statistic | 0.05 Critical Value (Trace) |

None | 13.64039 | 15.49471 |

At most 1 | 0.261131 | 3.841466 |

Unrestricted Cointegration Rank Test (Maximum Eigenvalue) | ||

Hypothesized No. of CE (s) | Maximum Eigenvalue | 0.05 Critical Value (Max) |

None | 13.37926 | 14.26460 |

At most 1 | 0.261131 | 3.841466 |

Note: Trace indicates no cointegration at the 0.05 level. Maximum-Eigenvalue indicates no cointegration at the 0.05 level.

The finding is similar to the study conducted by Ogoe [

Since there existed no long run relationship between gross domestic savings and economic growth, a Vector Autoregression (VAR) was conducted to assess the short run relationship between the two variables concerned of the study. However, before the short run relationship was carried out, the VAR lag order selection criterion was undertaken to ascertain the extent of the lag length that was used in the estimation of the VAR model. The lag length of the VAR model was 1. This was based on the Akaike Information Criterion (AIC) and Final Prediction Error (FPE) method given that there were 42 observations. According to Liew [

The cointegration test results conform to the VAR model because the model in question allows causality to emerge when variables are not cointegrated (Saltz [

Endogenous variables: LNGDP, LNGDS | ||||||
---|---|---|---|---|---|---|

Lag | LogL | LR | FPE | AIC | SBIC | HQ |

0 | −91.48879 | NA | 0.367404 | 4.674440 | 4.758884 | 4.704972 |

1 | 36.21830 | 236.2581* | 0.000757* | −1.510915* | −1.257583* | −1.419318* |

2 | 40.17055 | 6.916445 | 0.000760 | −1.508528 | −1.086308 | −1.355866 |

3 | 42.76800 | 4.285785 | 0.000819 | −1.438400 | −0.847292 | −1.224674 |

4 | 42.88774 | 0.185606 | 0.001003 | −1.244387 | −0.484391 | −0.969597 |

Note: * indicates lag order selected by the criterion.

Regressors | Economic Growth Equation | Savings Equation |
---|---|---|

lnGDP_{t}_{−1}_{ } | 0.968882*** | 0.631626 |

lnGDS_{t}_{−1}_{ } | 0.010132*** | 0.932507*** |

Constant | 0.590315 | −13.18600 |

R-squared | 0.993652 | 0.974872 |

Adjusted R-squared | 0.993334 | 0.973615 |

F-statistic | 3130.411 | 775.9206 |

Note: *** denotes significance at 1% level.

first difference of economic growth and the first difference of gross domestic savings.

The results showed statistical significance of the coefficients of the exogenous variables in economic growth equation. With the coefficients of 0.968882 and 0.010132, a 1% increase in economic growth and gross domestic savings in the previous year will cause the current rate of economic growth to rise by 0.97% and 0.01% respectively. Thus, a change in gross domestic savings has a significant positive impact on economic growth and therefore it is relevant to policy decisions on sustaining the economic growth. As it was expected, the constant term of economic growth was positive. This is because the aggregate demand curve theoretically has positive intercept. The R-squared value of 0.993652 implies that about 99% of the variation in the growth rate of the Ghana economy is explained by the independent variables in the model.

However, the results differed when gross domestic saving was endogenised. The coefficient of the lag of economic growth possessed its expected positive sign but it was not statistically significant with respect to its dynamic relationship with gross domestic savings. It was observed from the results that, a change in gross domestic savings at lag one has a significant effect on changes in gross domestic savings. Thus, a percentage change in the value of gross domestic savings a period ago results in a 0.93% change in gross domestic savings currently. Stated in another sense, an increase in the value of gross domestic savings a year ago leads to an increase in gross domestic savings in the current period. In addition, the intercept of the growth rate of savings has its expected negative sign since the saving function theoretically intercepts the Y-axis negatively. The negative constant term means that people dissave when they earn no income. The R-squared value of 0.974872 indicates that 97.5% of the deviation in the gross domestic savings is influenced by variations in the independent variables in the model.

In order to verify the direction of causality between gross domestic savings and economic growth in Ghana, a post VAR Granger causality was conducted.

The study realized that the null hypothesis that the first difference of gross domestic savings does not Granger cause the first difference of economic growth

Null Hypothesis | Chi-Squared | p-Value | Direction of Causality |
---|---|---|---|

lnGDS does not Granger cause lnGDP | 6.037663 | 0.0140** | Causality |

lnGDP does not Granger cause lnGDS | 1.029360 | 0.3103 | No Causality |

Note: ** represents rejection of the null hypothesis at 5% level.

was rejected, given a p-value of 0.0140. Thus, lags in gross domestic savings Granger cause movements in economic growth rate at 5% level of significance suggesting gross domestic savings is a better predictor of economic growth in Ghana.

In contrast, a look at the results of the test for the second equation revealed unrelated outcomes. The post VAR Granger causality accepted the null hypothesis that the coefficient on the lag of the economic growth at the first difference of the gross domestic savings equation is zero. The implication is that there exists no causality from the economic growth to gross domestic savings. This was evidenced from the p-value of 0.3103. Thus, past movements in Ghana’s economic growth rate do not Granger cause the variations in her gross domestic savings.

The results confirm the short run VAR results that, in Ghana, there exists a unidirectional causation between gross domestic savings and economic growth of which the direction of causation runs from gross domestic savings to economic growth. This finding upholds the Romer [

The pairwise Granger causality test was also conducted to provide a justification or otherwise for the VAR results above.

From

Null Hypothesis: | Obs. | F-Statistic | p-Value |
---|---|---|---|

lnGDS does not Granger Cause lnGDP | 41 | 2.28655 | 0.0963 |

lnGDP does not Granger Cause lnGDS | 0.38909 | 0.7616 |

The impulse response function, according to Sims and Zha [

A look at the panel revealed virtually no responses of gross domestic savings to the shocks in Ghanaian economic growth. However, it was found that the shocks in gross domestic savings had a permanent significant effect on the economic growth. This implies that a rise in gross domestic savings causes a significant effect on the economic growth. Thus, the results confirm the unidirectional causality running from gross domestic savings to economic growth.

The study was intended to investigate the relationship between gross domestic savings and economic growth in Ghana; with the specific objective of finding whether there exists a long run relationship between them, and it was also intended to ascertain the direction of causality between the two running actors in the study over the period of 1972 to 2013. The study employed Johansen cointegration test to reveal no long run relationship between gross domestic savings and economic growth in Ghana. This necessitated the usage of the VAR technique to estimate the short

run relationships. The finding was that there exists a unidirectional line of causation running from gross domestic savings to economic growth in Ghana. This empirical evidence has some policy implications. In view of this, the study recommends the following policies to stakeholders so as to accelerate savings and stimulate economic growth.

Incumbent and future governments must have “target savings” as a national agenda and policy. The country must have a specified amount or threshold that successive government must strive to attain if the country wishes to grow. This can be achieved by increasing the deposit rate. This is because the real interest rate on savings is a key ingredient for savings, investment and economic growth for that matter. So the regulatory body of the bank of Ghana must ensure the rise and abolishment of financial constraint on savings. This abolishment will increase the average efficiency of investment, the level of income will increase and savings will rise (see McKinnon and Shaw [

The current deposit rate stands at 5% per annum. This infinitesimal rate on deposits serves as a disincentive to savers and potential savers since the real returns on savings decline against the background of the high inflation rate. In view of this, rational economic agents and those at the surplus unit do not consider savings as a viable option and so diversify their portfolio to hold assets with high returns. It is strongly recommended therefore that the central bank will use the monetary policy instruments to influence and advise the commercial banks on the need to peg the deposit rate relatively higher at least equal or little above the existing interest rate. This is because the deposit rate is the opportunity cost of money demand for other purposes. So, the higher the deposit rate, the higher the opportunity cost. Economic agents would rationally minimise the cost by saving more to boost investment and growth.

Pickson, R.B., Enning, K.D. and Siaw, A. (2017) Savings- Growth Nexus in Ghana: Cointegration and Causal Relationship Analyses. Theoretical Economics Letters, 7, 139-153. https://doi.org/10.4236/tel.2017.72012