An Empirical Investigation of the Determinants of Savings and Investment Relationship: Evidence from South Asia

Abstract

This study examines the possible determinants of savings and investment (S-I) relationship in case of South Asia. The study adopted a unified framework to investigate relative significance of possible factors of S-I relationship. Firstly; saving retention coefficients has been estimated for each of six countries included in the analysis for the period of 1980-2015. Secondly, the dependent variable of saving retention coefficient has been regressed on the potential factors- country size, productivity shocks, interest rate differentials and openness-for the S-I association. The results reveal that S-I form a stable long run relationship for each country except Pakistan. Further, regression analysis indicates that country size, interest rate parity and productivity shock have positive and significant role in explaining the FH puzzle, while openness of the economy has no influence on the S-I interaction. Few important policy implications have been drawn from the results of the study; (i) ineffectiveness of financial openness in explaining the FH puzzle may indicate that these countries are unable to attract the investors, as investment do not merely depends upon the normal returns (iii) these countries need to bring consistency in economic policies so that openness could pay the desire role and (iv) our study also suggests that interest rates or country risk premium influenced the degree of financial integration. The central banks of South Asia countries should maintain interest rate parity with the rest of the world.