Bangladesh Bank Training Academy Journal

Abstract

The dynamic causal relationship between gross national savings and gross domestic product remains a contentious and lively issue in the literature. Even though the literature on this issue is voluminous, however for Bangladesh it is quite nascent. The paper explores the dynamic causal relationship between gross national savings and gross domestic product in Bangladesh over a long period of time (1974-2010) by applying Granger causality test, Johansen and Juselius cointegration test and Engel and Granger error correction models considering the stochastic properties of the variables. The issue of the short run dynamics of savings and other variables within a long run relationship has also been examined in the paper. The estimated results show that both variables are nonstationary at their levels and stationary at first differences. Then using cointegration technique it has been found that both the considered variables are cointegrated, implying that there is a stable long run relationshi between gross national savings and gross domestic product. The error correction model shows that the considered variables drift apart in the short run, however in the long run there is bidirectional causality between savings and economic growth. The implication of the result is that mobilising domestic savings are critical for capital accumulation and so for economic growth. The Granger causality test also shows the same result. Therefore attempts have to be made to increase national savings for capital accumulation and output growth in Bangladesh.