Saving-Investment Nexus and International Capital Mobility: Evidence from SAARC Countries

Abstract

The paper attempts to examine the validity of Feldstein-Horioka hypothesis for South Asian Association for Regional Cooperation (SAARC) countries for the period of 1980-2016. To accomplish the objective, the Granger causality test and auto regressive distributed lag (ARDL) bounds test of co-integration are applied. The significance of the business cycle shocks such as productivity, fiscal and terms of trade shocks is also tested. The results of co-integration test provide evidence in favor of low degree of capital mobility only for Bangladesh and India. So, FH puzzle does not exist for these countries. For rest of the countries, the domestic savings and investment are not correlated. The results of Granger causality test show that causality runs from savings to investment for Bangladesh and India. The results of business cycle shocks explain the high savings-investment correlation. The savings-retention coefficient remains well above zero even after controlling all three shocks.