Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.6, No.21, 2015 30 An Application of Vector Autoregressive Model on Investments and Savings in Nigeria OLANREWAJU, S.O. OGUNTADE, E.S. ZUBAIR, M.A. Department of Statistics, University of Abuja, p.m.b.117, Abuja. Nigeria Abstract The saving- investment relationship and its implication for economic growth across borders has been sharplydebated in the literature since the pioneering work of Feldstein and Horioka (1980). In this paper, the debate is extended to the Nigerian economy in Africa using the Vector Autoregressive (VAR) approach and causality tests on the Savings and Investment data obtained from the Central Bank of Nigeria (CBN).The effects of stochastic shocks to investment on savings and to savings on investment are explored and it was observed that savings granger causes investment and investment granger causes savings. Thus, policies should be concentrated towards enhancing the level of investment to bolster savings in the Nation. Keywords: Domestic saving, domestic investment, equilibrium, unit roots, cointegration, causality. 1.0 INTRODUCTION Economic growth and development to a great extent are determined by the rate of growth in domestic savings, investments and output of goods and services which includes real GDP per capital, human development amongst others. The wide divergence between the deposit and lending rates (interest rate spread) was an obstacle to economic growth and development of the Nigerian economy ,(CBN, 2001).Increase in domestic savings for instance; offer investors opportunities to have access to investment funds through financial intermediaries. Saving and investment are discovered to be highly correlated following the work done by Feldstein and Horioka (1980).The authors stressed further that the correlation between national savings and domestic investment can be used as a measure of international capital mobility, as the rate of return is the most relevant factor to investors if capital is perfectly mobile, domestic saving will not, necessarily be related to domestic investment. Feldstein and Horioka(1980) findings and interpretation of the high correlation coefficients between saving and investment as evidence of imperfect capital mobility across national boundaries conflict with conventional wisdom of international capital mobility, which argues that in the absence of financial controls, capital should flow between countries in search of a higher rate of return. Feldstein and Horioka (1980) generated a large body of research that supports the original empirical finding. These include Feldstein (1983), Feldstein and Bacchetta (1989), Baxter and Crucini (1993). In general, these studies contend that capital is not internationally mobile. Therefore, increases in domestic saving, other things equal, will flow into domestic investment. African economies are plagued with inefficient state enterprises, inadequate and deficient infrastructure, pervasive and burdensome trade restrictions, highly restrictive financial sector and trade regulations, poor corporate governance, political instability, and heavy external debt problems. It is therefore; natural to expect the macroeconomic forces and dynamics generating the relationship between savings and investment in these countries to be quite different from those found in the Organization of Economic Corporation and Developing (OECD) group of countries and other developing regions of the world. In this paper, the savings-investment correlation is re-examined using data for Nigeria. According to the economic theory, the increase in investment gives rise to more production and higher income. On the other hand, Zeller et al (1997) explained that access to savings has positive correlation with production, investment and consumption. Savings is one of the key relevant macroeconomic variables in any economy (Akperan&Akomaye, 2006) and the impact of savings on economic growth cannot be overemphasized. According to Lipsey& Chrystal (1999), savings are needed to finance investment and all things being equal, countries with high rates of national savings tend to have high investment rates and high growth rates of real gross domestic product (GDP). Though the following are barriers to savings in Nigeria (Onunugbo&Nwosu, 2006), High incidence of poverty and low nominal disposal income; under developed capital markets, unfavourable economic environment characterized by high unemployment and inflation. However, Nwachukwu and Odigie (2009) suggested that government policies aimed at improving fiscal balance has the potential of bringing about substantial increase in the National saving rate in Nigeria. From the foregoing, savings has long been thought to be a crucial source of economic growth through investment (Michael, 2007). Increase in savings increases the rate of investment. Foreign private investment is a significant component of foreign private capital flow that provides much needed finance to increase the use of existing capacity to stimulate new investment in developing countries (Salami, 2006). Ekpo (1997) &Iyoha (1998) identified certain factors that affect investment. They are macroeconomic instability, inflation, exchange rate, credibility, government expenditure as well as institutional and political factors. Also, higher interest rate triggers lower investment (Valentino, 2001). It was also discovered that exchange rate is