Volume 12, Issue 1, November 2014, Pages 295–308
Irfan Hussain Khan1, Prof. Dr. Bashir Ahmad Khilji2, and Ghulam Abbas3
1 Department of Economics, Preston University Kohat, Islamabad Campus, Pakistan
2 Department of Economics, Preston University Kohat, Islamabad Campus, Pakistan
3 Department of Sociology B.Z.U Bahadur sub Campus Layyah, Pakistan
Original language: English
Copyright © 2014 ISSR Journals. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
The present study is undertaken to examine the impact of interest rate, inflation rate and per capita income on household's saving in Pakistan for the period of 1981 to 2011. The study uses simple descriptive statistics to analyze the trend in household's saving. It also uses advance techniques of time series econometrics for modeling the household's saving function. It includes Granger causality test (Block erogeneity test), Johanson Co-integration, and general to specific methodology for modeling the appropriate Vector Error correction model. The applications of the techniques are based on the order of integration of time series data. It is, therefore, the reason that Augmented – Dickey Fuller test has been carried out for testing the order of integration of the time series variables, and thereby, selecting the estimation techniques for estimating parameters of the model. The careful inspection of the data reveals that all the variables are non-stationary at level, stationary at their first difference. Based on this characteristic of the data Johnson co-integration technique has been used for estimation, rather than simple OLS which is biased at the present case. The empirical results show that there exist equilibrium in long run relationship among per capita income, inflation, interest rate and household's saving. There is also significant error correction component which reveals that system reverts to its long run equilibrium in response to external shocks. These results are as per economic theory. On the basis of empirical evidence, it is suggested that inflation rate may be kept low so that real interest rate may be stimulated for accelerating rate of household's saving rate.
Author Keywords: Economy, Interest rate, per capita, income, household, saving, Pakistan.
Irfan Hussain Khan1, Prof. Dr. Bashir Ahmad Khilji2, and Ghulam Abbas3
1 Department of Economics, Preston University Kohat, Islamabad Campus, Pakistan
2 Department of Economics, Preston University Kohat, Islamabad Campus, Pakistan
3 Department of Sociology B.Z.U Bahadur sub Campus Layyah, Pakistan
Original language: English
Copyright © 2014 ISSR Journals. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
The present study is undertaken to examine the impact of interest rate, inflation rate and per capita income on household's saving in Pakistan for the period of 1981 to 2011. The study uses simple descriptive statistics to analyze the trend in household's saving. It also uses advance techniques of time series econometrics for modeling the household's saving function. It includes Granger causality test (Block erogeneity test), Johanson Co-integration, and general to specific methodology for modeling the appropriate Vector Error correction model. The applications of the techniques are based on the order of integration of time series data. It is, therefore, the reason that Augmented – Dickey Fuller test has been carried out for testing the order of integration of the time series variables, and thereby, selecting the estimation techniques for estimating parameters of the model. The careful inspection of the data reveals that all the variables are non-stationary at level, stationary at their first difference. Based on this characteristic of the data Johnson co-integration technique has been used for estimation, rather than simple OLS which is biased at the present case. The empirical results show that there exist equilibrium in long run relationship among per capita income, inflation, interest rate and household's saving. There is also significant error correction component which reveals that system reverts to its long run equilibrium in response to external shocks. These results are as per economic theory. On the basis of empirical evidence, it is suggested that inflation rate may be kept low so that real interest rate may be stimulated for accelerating rate of household's saving rate.
Author Keywords: Economy, Interest rate, per capita, income, household, saving, Pakistan.
How to Cite this Article
Irfan Hussain Khan, Prof. Dr. Bashir Ahmad Khilji, and Ghulam Abbas, “RELATIONSHIP BETWEEN INTEREST RATE AND HOUSEHOLD'S SAVINGS IN PAKISTAN,” International Journal of Innovation and Scientific Research, vol. 12, no. 1, pp. 295–308, November 2014.
