Domestic Investment, Savings and Economic Growth in Tanzania: A Dynamic Multivariate Analysis

Abstract

The study examined interdependence between domestic investment, savings and economic growth using cointegration and VECM. The study used time series data of 42 years from 1972 to 2012.  The result indicates no evidence of the existence of short run or long run correlation between savings and investment. The weak short run positive correlation is observed between savings and per capita GDP.  Moreover, there is long run positive correlation between investment and per capita GDP. Interestingly EDS found to have a long run significant positive correlation to both investment and savings but on the other hand significant negative correlation between EDS and per capita GDP in short run.  EDL found negatively correlated with investment over the long run.  Granger causality result provides strong evidence of joint influence of variables than individual causality.  The shock imposed on investment found to have positive long lasting effect on itself, savings and per capita GDP unlike savings shocks which dies away after short period on investment and long lasting negative impact on per capita GDP. Moreover, shock on per GDP is having long lasting effect on itself, investment and savings. We therefore suggest proactive policy which would encourage investment and promote growth. As a result, over the long run domestic saving will automatically increase and lead to sustainable economic growth.

Keywords: Investment, Savings, Economic growth, Cointegration, VECM, Impulse Response, Variance Decomposition