Dynamic interaction between savings, investment and economic growth in Nigeria: A Vector autoregressive (VAR) approach

Abstract

Several empirical studies abound in the literature that examines the causal link between savings, investment, and growth, but there seems to be no harmony as regards the existence and direction of the relationship between these variables. The study investigated the dynamic interaction between savings, investment and economic growth in Nigeria within the period 1981 to 2014, using annual time series data obtained from the World Bank Development Indicator (WDI). The study employed the impulse response function (IRF) and the variance decomposition of VAR as well as the granger causality test. The variance decomposition revealed that GDP account more for the variation in GDS while GDS account more for the variation in GDI. In addition, GDS account more for the variation in GDP. The impulse response function showed positive influences between the variables. The causality test however revealed that a uni-directional relationship running from GDP to GDS only exist, which suggest that GDP granger cause GDS. This invariably suggests that despite the positive interactions between the variables, they do not influence each other except for GDP influencing GDS. By implication the outcome of this study signal the fact that GDP significantly influence the GDS in the Nigerian economy. From the study, it was shown that GDS do not result to GDI, to resolve this, the Central Bank of Nigeria (CBN) through its policy formulation on sectoral credit allocation, should ensure that the savings with deposit money banks are properly channelled to long-term investment. The study further revealed that GDI do not result to GDP, to resolve this, government should ensures that all investment are properly channelled to the productive sector of the economy. Finally, to ensure improvement in economic growth, government must pay special attention to the dynamic interaction between GDS, and GDI by ensuring that the savings generated are properly channelled to viable project that will lead to the overall growth of Nigeria economy.

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