Private Saving-investment Nexus In Rwanda (1980-2016)

Abstract

The purpose of this study was to empirically examine the nature of the relationship between private saving and private investment in Rwanda. To achieve this purpose, we adopted the longrun generic model of saving and investment initiated by Feldstein and Horioka (1980) which was later modified in order to come to an improved specification that captures the study variables. Previous studies focused just on the aggregate domestic saving-investment relationship and no attempt was made to the disintegration of the total domestic saving-investment relation into their sub-components. Such analyses are critical as they would guide the possibility for countries to reassess their policy framework for investment. Hence, the contribution of this study was to fill this gap by investigating the nexus between Private Gross Domestic Saving (PGDS) and Private Gross Fixed Capital Formation (PGFCF) in Rwanda using the lately developed bounds test approach to cointegration. Cointegration test statistics showed that PGDS and PGFCF were cointegrated for Rwanda when PGFCF served a responding-variable. The ARDL technique indicated a tiny little correlation (0.08) between PGDS and PGFCF for Rwanda implying heavy dependence of PGFCF on foreign private saving, in the period under study. VECM tests statistics showed unidirectional long-run influence running from PGDS to PGFCF. The long-run empirical findings indicated that PGDS matters for PGFCF and therefore, this study suggests that government should implement policies aimed at removing obstacles to PGDS acceleration in order to influence PGFCF in Rwanda.