The Relationship between Savings and Growth in Developing Economies : A Vector Autoregressive Model

The purpose of this research paper is to provide empirical evidence regarding savings and growth relationship in seventeen African countries using an annual data spanning 1960 to 2000. We investigate the causal links between savings and growth using descriptive statistics, impulse response and variance decomposition of vector autoregressive models. The evidence from descriptive statistics shows that the response by savings to rising or falling in real GDP are not uniform across African countries but varies with inflation rates, saving habits and marginal propensity to consume, among others. The findings from the impulse response functions reveal that most impulse responses are negative in all the countries investigated, indicating an inverse relationship between savings and real gross domestic products in the African countries. The findings also show that while savings are sensitive to real GDP in the short run, it is insensitive to it in the long run. The variance decomposition results reveal that the predominant sources of savings fluctuations are due largely to "own shocks" and they vary from country to country