Savings, investment, and growth in Nepal: an empirical analysis

Abstract

This study analyzes the relationship between savings, investment, and economic growth in Nepal over 1975–2016. The structural breaks in the variables have been accounted for using the (Zivot and Andrews’s, J Bus Econ Stat 10: 251–270 1992) unit root test along with (Gregory and Hansen’s, Oxf Bull Econ Stat 58: 555–560, 1996) cointegration approach. The ARDL approach to cointegration in the presence of structural breaks has also been utilized to analyze the long-and short-run dynamics of savings, investment, and growth in Nepal. The results show structural breaks in the real GDP per capita during 2001 when the Royal Massacre and a state of emergency have taken place in Nepal. After allowing for this structural break, evidence of a cointegration relationship amongst savings, investment, and economic growth was identified. The estimates of the ARDL approach suggest that investment has a significant and positive impact on economic growth. However, gross domestic savings have a negative impact on growth in the long run. These results clearly show weaknesses of the economy in mobilizing savings into productive sectors.