SAVINGS AND GROWTH IN BANGLADESH

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					    SAVINGS AND GROWTH IN BANGLADESH
                                        Pradeep Agrawal
                                        Pravakar Sahoo∗
                              Institute of Economic Growth, India


ABSTRACT

Savings and growth are often strongly correlated. Thus, it is important to study the determinants of
savings and the direction of causality between savings and growth as these have important
implications for development policy. Yet, careful empirical studies on savings behavior are missing
for Bangladesh. Thus, in this paper, we estimate the long-run total and private savings functions for
Bangladesh using recent time series techniques. We find that the total savings rate is mainly
determined by the GDP growth rate, dependency ratio, interest rates and bank density. The private
savings rate is also affected by the public savings rate. Further, using the Granger Causality tests,
we find that in Bangladesh, there is a bi-directional causality between savings and growth. We also
carry out the Forecast Error Variance Decomposition (FEVD) analysis using the VAR framework.
The FEVD results confirm the causality results obtained using the Granger causality tests as well as
the estimated savings functions.

JEL Classifications: E21, O16
Keywords: Savings, Growth, Bangladesh, Causality, Co-integration
Corresponding Author’s Email Address: pradeep@iegindia.org

INTRODUCTION

Savings and growth are often strongly correlated. Thus, it is important to study the
determinants of savings and the direction of causality between savings and growth as
these have important implications for development policy. There are some recent studies
(see Loayza et al. 2000; Lopez et al. 2000; Schmidt-Hebbel et al. (1996) on the
determinants of savings behavior in pooled time series cross-section data on a large
number of countries. However, savings behavior shows considerable variation across
countries depending on their socio-economic structure and one cannot be sure whether
the results of such pooled studies, which are applicable to the average country in the
sample, apply to the particular country in question. Thus, cross country regression
analysis based on the assumption of homogeneity is not appropriate for each sample
country. Given the vast differences among countries with respect to structural features,
institutional aspects and also the quality of data, cross-country comparison and estimation
is fraught with danger (Deaton, 1989).
          It is evident therefore that country specific studies are also important. Taking the
example of Bangladesh, a proper empirical study using modern time series techniques is
missing (with the exception of Chowdhury, 2001). While the emphasis in Chowdhury’s
paper is on the financial sector and the impact of financial liberalization on private
savings in Bangladesh, the emphasis in our paper is on analyzing the direction of
causality between savings and growth, in addit
				
DOCUMENT INFO
Description: Savings and growth are often strongly correlated. Thus, it is important to study the determinants of savings and the direction of causality between savings and growth as these have important implications for development policy. Yet, careful empirical studies on savings behavior are missing for Bangladesh. Thus, in this paper, we estimate the long-run total and private savings functions for Bangladesh using recent time series techniques. We find that the total savings rate is mainly determined by the GDP growth rate, dependency ratio, interest rates and bank density. The private savings rate is also affected by the public savings rate. Further, using the Granger Causality tests, we find that in Bangladesh, there is a bi-directional causality between savings and growth. We also carry out the Forecast Error Variance Decomposition (FEVD) analysis using the VAR framework. The FEVD results confirm the causality results obtained using the Granger causality tests as well as the estimated savings functions. [PUBLICATION ABSTRACT]
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