The savings-­growth nexus for Indonesia (1981-­2012)

This paper investigates the relationship between economic growth and savings in Indonesia from 1981 2012. Foreign Direct Investment (FDI) is added as an extra variable to identify possible spuriousness in the causation. The Johansen test on cointegration is used to search for a long run relationship, a Vector Error Correction (VEC) model is constructed to examine a short run relationship and the Granger test on causality is used to find the direction of the relationship. After performing robustness checks, it can be concluded that there is significant evidence that Gross Domestic Savings (GDS) and Gross Domestic Product (GDP) are cointegrated and therefore hold a long run relationship. Via the Wald test, also a short run relationship is identified. The Granger test indicates that savings are Granger-­caused by economic growth. FDI does not play a significant role.