Savings, investment, and growth in Nepal: an empirical analysis

Aadersh Joshi,Sumit Pradhan,Jagadish Prasad Bist

doi:10.1186/s40854-019-0154-0

Aadersh Joshi, Sumit Pradhan + Show 1 more

Open Access

https://doi.org/10.1186/s40854-019-0154-0

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Journal: Financial Innovation	Publication Date: Nov 6, 2019
Citations: 16	License type: open-access

Affiliation: University of the West of England

Abstract

This study analyzes the relationship between savings, investment, and economic growth in Nepal over 1975–2016. The structural breaks in the variables have been accounted for using the (Zivot and Andrews’s, J Bus Econ Stat 10: 251–270 1992) unit root test along with (Gregory and Hansen’s, Oxf Bull Econ Stat 58: 555–560, 1996) cointegration approach. The ARDL approach to cointegration in the presence of structural breaks has also been utilized to analyze the long-and short-run dynamics of savings, investment, and growth in Nepal. The results show structural breaks in the real GDP per capita during 2001 when the Royal Massacre and a state of emergency have taken place in Nepal. After allowing for this structural break, evidence of a cointegration relationship amongst savings, investment, and economic growth was identified. The estimates of the ARDL approach suggest that investment has a significant and positive impact on economic growth. However, gross domestic savings have a negative impact on growth in the long run. These results clearly show weaknesses of the economy in mobilizing savings into productive sectors.

Highlights

The importance of savings in developing countries depends on the long-debated economic theory that the rate of economic growth is the function of the rate of investment and the latter is constrained by the rate of domestic savings (Arndt 1991)
The null hypotheses of the augmented Dickey–Fuller (ADF) and Phillips–Perron test (PP) tests refer to the existence of a unit root asignificant at the 1% level owing to the low power and other problems associated with these tests, the autoregressive-distributed lag (ARDL) bounds testing approach for cointegration has been performed to analyze the long and short-run dynamics of savings, investment, and growth
GPC, Gross domestic savings (GDS), and INV stand for real Gross domestic product (GDP) per capita, gross domestic savings, and investment, respectively

Summary

Introduction

The importance of savings in developing countries depends on the long-debated economic theory that the rate of economic growth is the function of the rate of investment and the latter is constrained by the rate of domestic savings (Arndt 1991). Following the Johansen cointegration results, the Gregory–Hansen procedure for cointegration is estimated to test the existence of a long-run relationship between growth, savings, and investment with an endogenously determined structural break. The results show a long run cointegrating relationship between growth, savings, and investment when economic growth is used as a dependent variable in the structural break of 2001. The null hypotheses of the ADF and PP tests refer to the existence of a unit root asignificant at the 1% level owing to the low power and other problems associated with these tests, the ARDL bounds testing approach for cointegration has been performed to analyze the long and short-run dynamics of savings, investment, and growth. The values (p, q, r) are the selected number of lags

Result

Findings

Conclusions and policy recommendations