Abstract
The aim of this paper is to re-examine the relationship between saving and investment in the case of ECOWAS countries. We then employ the Gregory and Hansen (J Econometr 70:99–126, 1996a; Oxford Bull Econ Stat 58:555–560, 1996b) threshold cointegration tests and the Toda and Yamamoto (J Econometr 66:225–250, 1995) causality procedure. Threshold cointegration approach allows estimating changes in the saving-retention coefficients over time. Using yearly data for the period from 1960 to 2007, we show out two groups of countries regarding the cointegration test results. In the first group (The Gambia and Togo), capital is perfectly mobile since there is no long-run relationship between savings and investment. The second group comprised of the ten other ECOWAS countries studied, is characterized by an incomplete capital mobility. Moreover, in the second group the saving-retention coefficient is time-varying in most of the ECOWAS countries (except for Benin and Niger) and is different from a country to another one. The changes in the saving-retention coefficients indicate how international capital mobility has changed. Moreover, the inclusion of trade openness and country size in the saving-investment equation reduces the saving retention coefficients implying improvement of capital mobility over time. Furthermore, investment rates cause saving rates in Benin, Guinea-Bissau and Niger while saving rates cause investment rates in Cote d’Ivoire, Nigeria and Sierra Leone.
Similar content being viewed by others
Notes
To save space, we do not present figures about trade openness and country size.
References
Adedeji OS, Thornton J (2007) Saving, investment and capital mobility in African countries. J Afr Econ 16:393–405
African Development Bank (2008) Selected statistics on African countries. African Development Bank, XXVII
AmirKhalkhali S, Dar A (2007) Trade openness and saving-investment correlations. Econ Modell 24:120–127
Andrade P, Bruneau C, Gregoir S (2005) Testing for the cointegration rank when some cointegrating directions are changing. J Econometr 124:269–310
Andrews DWK (1993) Test for parameter stability and structure change with unknown change points. Econometrica 61:821–856
Apergis N, Tsoumas C (2009) A survey of the Feldstein Horioka puzzle: what has been done and where we stand. Res Econ 63:64–76
Bagnai A (2006) Structural breaks and the twin deficits hypothesis. Int Econ Econ Policy 3:137–155
Bahmani-Oskooee M, Chakrabarti A (2005) Openness, size, and the saving-investment relationship. Econ Syst 29:283–293
Balke NS, Fomby TB (1997) Threshold cointegration. Int Econ Rev 38:627–645
Bangake C, Eggoh JC (2011) The Feldstein–Horioka puzzle in African countries: a panel cointegration analysis. Econ Modell 28:939–947
Baxter M, Crucini MJ (1993) Explaining saving-investment correlations. Am Econ Rev 83:416–436
Bencivenga VR, Smith B (1991) Financial intermediation and endogenous growth. Rev Econ Stud 58:195–209
Blanchard O, Giavazzi F (2002) Current account deficits in the Euro area: the end of the Feldstein-Horioka puzzle?. Brook Pap Econ Activity 2:147–186
Caprio GA Jr, Howard DH (1984) Domestic saving, current accounts, and international capital mobility. International Finance Discussion Paper no 244. Federal Reserve Board, Washington, DC
Chakrabarti A (2006) The saving-investment relationship revisited: new evidence from multivariate heterogeneous panel cointegration analyses. J Comparat Econ 34:402–419
Christiano LJ (1992) Searching for breaks in GNP. J Bus Econ Stat 10:237–250
Coakley J, Kulasi F (1997) Cointegration of long span saving and investment. Econ Lett 54:1–6
Coakley J, Kulasi F, Smith R (1996) Current account solvency and the Feldstein–Horioka puzzle. Econ J 106:620–627
Demirgüc-Kunt A, Maksimovic V (1998) Law, finance and firm growth. J Finance 53:2107–2131
Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74:427–431
Dorosh PA, Sahn DE (2003) A general equilibrium analysis of the effect of macroeconomic adjustment on poverty in Africa. J Policy Model 22:753–776
Enders W, Falk B (1998) Threshold-autoregressive, median-unbiased, and cointegration tests of purchasing power parity. Int J Forecast 14:171–186
Enders W, Granger CWF (1998) Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. J Bus Econ Stat 16:304–311
Enders W, Siklos PL (2001) Cointegration and threshold adjustment. J Bus Econ Stat 19:166–176
Engle RF, Granger CWJ (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55:251–276
Eslamloueyan K, Jafari M (2010) Capital mobility, openness, and saving-investment relationship in Asia. Econ Modell 27:1246–1252
Evans P, Kim B-H, Oh K-Y (2008) Capital mobility in saving and investment: a time-varying coefficients approach. J Int Money Finance 27:806–815
Fattouh B (2005) Capital mobility and sustainability: evidence from U.S current account data. Empiric Econ 30:245–253
Feldstein M (1983) Domestic saving and international capital movements in the long run and the short run. Eur Econ Rev 21:129–151
Feldstein M, Horioka C (1980) Domestic saving and international capital flows. Econ J 90:314–329
Fosu AK, Kimenyi MS, Ndung’u NS (2003). Economic reforms and restructuring in Sub-Saharan Africa: an overview. J Afr Econ 12:ii1–ii11
Fourquau J, Hurlin C, Rabaud I (2008) The Feldstein-Horioka puzzle: a panel smooth transition regression approach. Econ Modell 25:284–299
Georgopoulos GJ, Hejazi W (2005) Feldstein-Horioka meets a time trend. Econ Lett 86:353–357
Goldsmith RR (1969) Financial structure and development. Yale University Press, New Haven
Gregory AW, Hansen BE (1996a) Residual-based tests for cointegration in models with regime shifts. J Econometr 70:99–126
Gregory AW, Hansen BE (1996b) Tests for cointegration in models with regime and trend shifts. Oxford Bull Econ Stat 58:555–560
Gregory AW, Nason JM, Watt D (1994) Testing for structural breaks in cointegrated relationships. J Econometr 71:321–341
Gurley JG, Shaw ES (1955) Financial aspects of economic development. Am Econ Rev 45:515–538
Guzel A, Ozdemir ZA (2011) The Feldstein–Horioka puzzle in the presence of structural shifts: the case of Japan versus the USA Research. Int Bus Finance 25:195–202
Hansen BE (1992) Tests for parameter instability in regressions with I(1) processes. J Bus Econ Stat 10:321–335
Hansen BE, Seo B (2002) Testing for two-regime threshold cointegration in vector error-correction models. J Econometr 110:293–318
Hericourt J, Maurel M (2005) The Feldstein-Horioka puzzle revisited: An european-regional perspective. William Davidson Institute Working Paper, no 763
Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Dyn Control 12:231–254
Johansen S, Juselius K (1990) Maximum likelihood estimation and inferences on cointegration with applications to the demand for money. Oxford Bull Econ Stat 52:169–210
Kim SH (2001) The saving-investment correlation puzzle is still a puzzle. J Int Money Finance 20:1017–1034
Kim S, Kim SH, Wang Y (2007) Saving, investment and international capital mobility. Jpn World Econ 19:279–291
Kim D, Perron P (2009) Unit root tests allowing for a break in the trend function at an unknown time under both the null and alternative hypotheses. J Econometr 148:1–13
Kollias C, Mylonidis N, Paleologou S-M (2008) The Feldstein-Horioka puzzle across EU members: evidence from ARDL bounds approach and panel data. Int Rev Econ Finance 17:380–387
Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45:1–28
Lau E, Baharumshah AZ (2003) Sustainability of external imbalances: the case of Malaysia. Singapore Econ Rev 48:61–80
Levine R, Loayza N, Beck T (2000) Financial intermediation and growth: causality and causes. J Monetary Econ 46:31–77
Lo M, Zivot E (2001) Threshold cointegration and nonlinear adjustment to the law of one price. Macroecon Dyn 5:533–576
Lucas RE (1988) On the mechanics of economic development. J Monetary Econ 22:3–42
Mamingi N (1997) Savings-investment correlations and capital mobility: the experience of developing countries. J Policy Model 19:609–626
McKinnon RI (1973) Money and capital in economic development. Brookings Institution, Washington, DC
Miller S (1988) Are saving and investment cointegrated?. Econ Lett 27:31–34
Murphy RG (1984) Capital mobility and the relationship between saving and investment in OECD countries. J Int Money Finance 3:327–342
Murphy RG (1986) Productivity shocks, non-traded goods and optimal capital accumulation. Eur Econ Rev 30:1081–1095
Nell KS, Santos LD (2008) The Feldstein-Horioka hypothesis versus the long-run solvency constraint model: a critical assessment. Econ Lett 98:66–70
Obstfeld M (1995) International capital mobility in the 90s. In: Kenen PB (ed) Understanding Interdependence: the Macroeconomics of the open economy. Princeton University Press, Princeton
Obstfeld M, Taylor AM (1997) Nonlinear aspects of goods market arbitrage and adjustment: Heckscher’s commodity points revisited. J Jpn Int Econ 11:441–479
Oh K, Kim B, Kim H, Ahn B (1999) Savings-investment cointegration in panel data. Appl Econ Lett 6:477–480
Payne JE (2005) Saving-investment dynamics in Mexico. J Policy Model 27:525–534
Payne JE, Kumazawa R (2005) Capital mobility, foreign aid, and openness: further panel data evidence from Sub-Saharan Africa. J Econ Finance 29:122–126
Perron P (1989) The great crash, the oil price shock and the unit root hypothesis. Econometrica 57:1361–1401
Perron P (1990) Testing for a unit root in a time series with a changing mean. J Bus Econ Stat 8:153–162
Phillips PCB, Ouliaris S (1990) Asymptotic properties of residual based tests of cointegration. Econometrica 58:165–193
Phillips PCB, Toda HY (1993) Limit theory in cointegrated vector autoregressions. Econometr Theory 9:150–153
Rebelo ST (1991) Long run policy analysis and long run economic growth. J Polit Econ 99:500–521
Reinhart CM, Tokatlidis I (2003) Financial liberalisation: the African experience. J Afr Econ 12:ii53–ii88
Robinson J (1952) The rate of interest and other essays. Macmillan, London
Romer PM (1986) Increasing returns and long-run growth. J Polit Econ 94:1002–1032
Roubini N (1988) Current account and budget deficits in an intertemporal model of consumption and taxation smoothing: a solution to the ‘Feldstein-Horioka Puzzle’? Unpublished Manuscript, Yale University
Sachsida A, Caetano A (2000) The Feldstein-Horioka puzzle revisited. Econ Lett 68:85–88
Summers LH (1988) Tax policy and international competitiveness. In: Frankel J (ed) International aspects of fiscal policies. University of Chicago Press, Chicago
Taylor AM (2001) Potential pitfalls for the purchasing-power-parity puzzle? Sampling and specification biases in mean-reversion tests of the law of one price. Econometrica 69:473–498
Telatar E, Telatar F, Bolatoglu N (2007) A regime switching approach to the Feldstein-Horioka puzzle: evidence from some European countries. J Policy Model 29:523–533
Toda HY, Yamamoto T (1995) Statistical inference in vector autoregressions with possibly integrated processes. J Econometr 66:225–250
Wong D (1990) What do saving-investment relationships tell us about capital mobility?. J Int Money Finance 9:60–74
World Bank (2008) 2008 World development indicators. World Bank, Washington, DC
Wu JL (1998) Are budget deficits ‘Too Large’?: the evidence from Taiwan. J Asian Econ 9:519–528
Yamada H (1998) A note on the causality between export and productivity: an empirical re-examination. Econ Lett 61:111–114
Zivot E, Andrews DWK (1992) Further evidence on the great crash, the oil price shock and the unit root hypothesis. J Bus Econ Stat 10:251–270
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Esso, L.J. Re-examining the saving-investment nexus: threshold cointegration and causality evidence from the ECOWAS. Econ Change Restruct 45, 193–220 (2012). https://doi.org/10.1007/s10644-011-9115-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10644-011-9115-y