Determinants of National Savings: A Short and Long Run Investigation in Ghana

Abstract

The study investigated the determinants of national savings by employing the Johansen cointegration technique and error correction model to examine the short run and long run dynamics of the system using time-series data for Ghana over the 1975-2008 period. The study found all the variables to be integrated of order one and the existence of co integration indicated a valid long run economic relationship among the determinants of national saving in Ghana. The empirical results established that in the long run, income and terms of trade have a positive and significant impact on savings while dependency ratio, political instability and the real interest rate have a negative impact on savings. In the short run however, only terms of trade positively affects savings. The other variables namely dependency ratio, political instability, financial deepening, income and interest rate have an insignificant impact on savings. The error correction term has a coefficient of -0.830376 which shows that there will be about 83.04 percent speed of adjustment toward long run equilibrium when there is any imbalance in the short run.

Keywords: National Savings, Co-integration; Life Cycle Hypothesis, Error Correction Model; Ghana