Examines the causal relationship between interest rates, savings and income in the Chinese economy over the period 1952 to 1999, using the cointegration test and Bayesian vector autoregression (BVAR) for empirical testing. The empirical evidence from the cointegration test confirms that there is a stable long‐run relationship between interest rates, savings and income, whilst the BVAR causality test shows unidirectional causality running from savings to income. For China’s transitional economy, it is therefore important to establish well‐developed financial institutions – particularly the independence of the Central Bank – interest rate liberalization and sound financial intermediation, all of which are important for the efficient allocation of capital, which, in turn, can help to establish sustainable economic growth.
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