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An autoregressive distributed lag (ARDL) analysis of the nexus between savings and investment in the three Asian economies

Author

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  • Nurul Wahilah Abdul Latif
  • Zulkifli Abdullah
  • Muhamad Azhan Md Razdi

    (Universiti Tenaga Nasional, Malaysia)

Abstract

Savings and investment play a major role in any countries to fostering long term growth. It shows the amount of saving being converted into investment in the domestic economies which is related with capital mobility in the countries. Ever since seminal paper by Feldstein Horioka (1980), the issue regarding the relationship between saving and investment become one of the popular issues among economist researchers. They found that it has a strong relationship between saving and investment where about 85 percent to 95 percent approximately of the domestic saving are converted into domestic investment and at the same time capital mobility is relatively low. It means that saving and investment were circling around in the domestic countries rather than mobile to other countries. Many researchers relate this issue with capital immobility as domestic saving is easily transferred to the other countries and vice versa. As such, the aim of the present paper is to reinvestigate the nexus between saving and investment for the three-Asian economies namely China, India and Malaysia by employing the recent Autoregressive Distributed Lag (ARDL) co-integration modelling approach. Three emerging Asian countries have been chosen in this research which have its own economic strength and weaknesses. In which, the GDP growth prospect for China, India and Malaysia is 7%, 6% and 5% approximately in 2015. This study covers the annual sample from 1970 to 2013. The present paper employs ARDL bound procedure to test the presence of a co-integrated relationship which involves the standard F-test. One of the advantages of ARDL test is that it is more robust and performs better for small sample size of data which suitable for this research. The sample size is 43 years for each country. The annual time series data of saving and investment ratio as percentage of GDP in each country were utilized in this study. The result shows that the null hypothesis of the unit roots for the saving and investment series is rejected in first difference. It reveals that all the variables are co-integrated at first different. The ARDL F-test yields evidence a positive long run relationship between savings and investment for the three emerging Asian countries namely, Malaysia, China and India which is consistent with many past researches. It shows that the estimated ECTt-1 coefficient is found to be negative and statistically significant at 1% confidence level for China and India. Meanwhile, the estimated ECTt-1 is negative and statistically significant at 5% confidence level for Malaysia. As such, this results confirm the existence of long run relationship between savings and investment in the three countries concurrently. In the short run, it has a positive significant relationship between saving and investment in China and India. Furthermore, the estimated model has passes the diagnostic test and the stability test. Based on the finding, the speed of adjustment for Malaysia, India and China are 31%, 23% and 15% respectively. It indicates moderate speed of adjustment back to equilibrium. From this research paper, It shows that there is relationship between [End Page 323] saving and invest in the three Asian countries. Thus, it is recommended that the three-Asian countries should not neglect its savings if the countries wish to spur its investments of which, will consequently generate economic growth.

Suggested Citation

  • Nurul Wahilah Abdul Latif & Zulkifli Abdullah & Muhamad Azhan Md Razdi, 2015. "An autoregressive distributed lag (ARDL) analysis of the nexus between savings and investment in the three Asian economies," Journal of Developing Areas, Tennessee State University, College of Business, vol. 49(3), pages 323-334, July-Sepe.
    • Handle: RePEc:jda:journl:vol.49:year:2015:issue3:pp:323-334
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    References listed on IDEAS

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    1. De Vita, Glauco & Abbott, Andrew, 2002. "Are saving and investment cointegrated? An ARDL bounds testing approach," Economics Letters, Elsevier, vol. 77(2), pages 293-299, October.
    2. Jiranyakul, Komain & Brahmasrene, Tantatape, 2008. "Cointegration between Investment and Saving in Selected Asian Countries: ARDL Bounds Testing Procedure," MPRA Paper 45076, University Library of Munich, Germany.
    3. Tamim Bayoumi, 1990. "Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 360-387, June.
    4. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
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    More about this item

    Keywords

    Savings; Investment; Autoregressive Distributed Lag (ARDL);
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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