Saving-Investment Relationships in Asian Countries

Abstract

This paper studies the relationship between saving and investment rates in Japan and other 11 Asian countries. Most previous studies on the topic have almost exclusively focused on OECD countries. The augmented Dickey-Fuller and Phillips-Perron unit root tests indicate that for most of the 12 Asian countries, both saving and investment rates have unit roots. However, Johansen multivariate cointegration tests indicate that only for Japan, Indonesia and Thailand, the two rates have a long run relationship. When structural breaks are taken into account, we find that the two rates are cointegrated for Japan, India, Malaysia and Thailand. While Feldstein and Horioka would argue that the existence of such a relationship means that capital is less mobile internationally for these countries, recent studies have shown that it is possible to have a strong relationship between the two rates and a high degree of international capital mobility. However, the presence of the long run relationship between saving and investment rates can be interpreted to mean that an increase in the saving rate may not be enough for these countries to reduce the current account deficit. We also conduct Granger causality tests with structural breaks for the growth rates of saving and investment rates. These causality tests show that the growth of the saving rate causes the growth of the investment rate for Japan, Malaysia, Singapore, Sri Lanka and Thailand. This goes against the post-Keynesian position. However, the reverse causality holds for Japan, Hong Kong, India, Malaysia, Myanmar and Singapore. This supports the post-Keynesian approach.

JEL Classification: C22, E21, F41, O11