The Causal Relationship between Savings and Investment in Jordan (A prospective study for the period 1980-2013)

Abstract

This study aimed to discuss concerning the link between savings and investment, and highlight on most of the past studies concerning this relationship are cross-sectional in nature. The obvious difficulty with such studies is the homogeneity assumption that is usually made across the countries under investigation.

In light of this, the study tried to fill this gap in some ways by attempting to investigate the causal relationship between savings and investment in Jordan using relevant econometric techniques, like Augmented Dickey-Fuller (ADF) test in a regression & Johansen co integration test.

The evidence arising from the study suggests that, savings and investment are co-integrated. In other words, there is no reason to suspect either a long-run or equilibrium relationship between these two variables.

This could also be interpreted to imply the existence of high capital mobility. Furthermore, a unidirectional causal relationship between savings and investment in Jordan running from savings to investment was observed, and the main findings in this study were:  Johansen co-integration test result shows evidence of co-integration implying that there is a long run relationship between GDP and savings, investment and FDI in Jordan. Savings and domestic investment have long run positive and significant impact on the Jordanian economy while FDI has negative but insignificant impact on the economy

Keywords’: Investment, Savings, ,Time series macroeconomic data, FDI, GDP, Augmented Dickey-Fuller (ADF) test, Johansen co-integration test