Savings, Investment and Economic Growth Nexus in Nigeria: A Simultaneous Equation Model Estimation

Abstract

Economic growth has become the main thrust of developing countries across the globe for the simple fact that it is not just the precursor to development, but also in the enhancement of   the welfare of the citizenry, and the role of savings and investment are of pivotal importance in this regard. This study explored the complementarity of the savings, investment and economic growth nexus with the use of the simultaneous equation technique. Three endogenous equations were estimated viz; savings, investment and output, using the explanatory variables of current GDP (GDP_t), interest rates (INTR_t) and investment (INV_t) for the first model, ditto for the other two models, save for the addition of the current exchange rate (EXR_t) variable in the second model, as well as the addition of the current inflation rate (INF_t) variable in the third model. Unit test was conducted on the variables to determine their times series characteristics using ADF statistics, and the cointegration test was also carried with the help of Johansen technique. The identification condition of the model was also determined before its estimation. The results in our estimated model indicates that most of the explanatory variables met our a priori  expectation, and were significant determinants of the endogenous variables, with the exception of the inflation variables in models two and three respectively. Based on these results, the study recommended that government should implement policies that improves national income through various ways like wage indexation, legislation and the likes. It was also suggested that government should create the enabling environment for businesses to thrive, and thus advance the citizens’ welfare, by improving the infrastructures, reducing red tapes and all such impediments that stand in the way of optimal government and business performances in Nigeria, among others.

Keywords: Savings, Investment, Economic Growth, Simultaneous Equation Model

JEL Classification: E2, E21, 047, C3

DOI: 10.7176/JESD/15-5-04

Publication date: April 30^th 2024