Is saving really prior to investment? Time series and panel evidence in the WAEMU

Abstract

PurposeThis study aims to re‐examine the direction of causality between investment and saving in the West African Economic and Monetary Union (WAEMU).Design/methodology/approachThe study is empirical, testing for Granger causality between investment and saving as well as for other pertinent variables in the determination of the two variables of interest. It uses two methods: co‐integration and decomposition of variances on the one hand, and dynamic panel on the other.FindingsThe use of recent developments in the treatment and analysis of time series data and the inclusion of relevant variables omitted in prior studies help to shed more light on the contradictory results that exist so far. The empirical result is a proof that saving is a real constraint on investment in the financially moderate economies of the WAEMU.Practical implicationsThe paper encourages own resource mobilisation for economic growth and development. Ideas generated in the study suggest that financial liberalization per se will not work unless enough flow of domestic savings exists in a country.Originality/valueIt is one of the recent attempts to investigate this issue within a group of African countries operating in an economic and monetary union. The strength of the paper is the use of various econometric methods to address the issue.