Domestic Savings, Investment, and Economic Growth: An Empirical Evidence from Nepal Using VEC model

This study examines the relationship between domestic savings, investment, and economic growth in Nepal by using time series data covering from the period 1975 to 2019. The vector error correction model (VECM) has been used to investigate the long-run and short-run causal relationship between the variables. 

The Johansen cointegration test results confirmed that there is a long-run relationship between savings, investment, and economic growth therefore, further analysis has to be set for the VEC model to analyze both long-run and short-run causality. The VECM equation result is -0.1363 which indicates that the adjustment speed of disequilibrium is 13.63 percent on average towards the equilibrium position in the long-run but the results are not significant at a 5 percent level of significance. The coefficients of savings and investments are positive with economic growth which also indicates that both variables have a positive impact on economic growth in the short-run. The results of the Jarque-Bera test show the residual distribution is normally distributed. For the model stability test, the study performed recursive estimation applying CUSUM and CUSUM of square, and both tests move within the 5 percent level of upper and lesser bound significance indicating that the model is stable over the observation period.

This study suggests that in Nepal, there is a positive role of domestic savings and investment growth for the economic growth. The central bank, planning commission, and ministry of finance should focus on promoting domestic capital formation via domestic savings and properly investing those funds in the productive sector to stimulate sustainable economic growth in Nepal.