Causal Relationship between Domestic Savings and Economic Growth: Evidence from Seven African Countries

Abstract

This paper utilizes cointegration and the vector error‐correction model (VECM) to explore the causal relationship between economic growth and growth rate of domestic savings for Congo, Côte d’Ivoire, Ghana, Kenya, South Africa, and Zambia. Specifically, three analyses were undertaken. First, the time series properties of economic growth and domestic savings were ascertained with the help of the augmented Dickey–Fuller unit root procedure. Second, the long‐run relationship between economic growth and growth rate of domestic savings was examined in the context of the Johansen and Juselius (1990) framework. Finally, a Granger‐causality test was undertaken to determine the direction of causality between economic growth and growth rate of domestic savings. The results indicate one order of integration [I(1)] for each of the series. The results of the cointegration tests suggest that there is a long‐run relationship between economic growth and growth rate of savings. The results from the Granger‐causality tests indicate that contrary to the conventional wisdom, economic growth prima facie causes growth rate of domestic savings for most of the countries under consideration.