Determinants Of Savings Behavior In Pakistan: Long Run - Short Run Association And Causality

Abstract The existing studies on private savings have mostly investigated the long run and short association of different variables with private savings, whereas no known study has investigated both long run and short run causality of variables against private savings by using data of Pakistan. The current study used time series data of Pakistan over the period of 1972 to 2012 and employed long run cointegration test, first normalized equation for long run association, vector error correction model for short run association, Toda Yamamoto technique for long run causality and Granger causality test for short run causality. The results suggest that GDP per capita, inflation rate, financial development, dependency ratio and fiscal development have impact on the private savings rate in Pakistan. The findings of the current study can be used to increase the private savings’ rate. In the long run government can increase the private savings by controlling fiscal deficit and promoting the investment by private investors. Whereas, in the short run, government can increase the deposit rate to increase the private savings. The current study is unique in its nature as it simultaneously provides the long run and short run causality and association and can contribute significantly in improving savings rate in developing economies like Pakistan.