SAVINGS AND ECONOMIC GROWTH IN PAKISTAN: AN ISSUE OF CAUSALITY

Abstract

The objective of the paper is to investigate causal relationship between savings and output in Pakistan by using quarterly data for the period of 1973:1 to 2003:4. The co-integration and the vector error correction techniques are used to explore causal relationship between savings and economic growth. The results suggest bi-directional or mutual long run relationship between savings and output level. However, there is unidirectional long run causality from public savings to output (GNP and GDP), and private savings to gross national product (GNP). The results also indicate that the speed of adjustment in case of savings is stronger than that of level of output. The overall long run results of the study favour the capital fundamentalist's point of view that savings precede the level of output in case of Pakistan. The short run mutual relationship exists between gross domestic product (GDP) and domestic savings. The results also indicate unidirectional short run causality from gross national product (GNP) to national and domestic savings; and from gross domestic product (GDP) to public savings. The short run causality runs only from national savings to gross domestic product (GDP). So overall short run results favour Keynesian point of view that savings depend upon level of output.