Aid-Savings Nexus: Cointegration, Causality and Error Correction Modeling Approach

Abstract

In the last four decades, the aid-saving debate has generated intense discussion between pro-aid liberal economists and radical anti-aid economists and produced many empirical studies. The focus of this debate has been to determine whether in a less developed country, foreign aid inflows and domestic savings are complementary or substitute. This study concludes that the results from previous studies have in aggregate been controversial, largely because of the methodological limitations and that a significant long-run positive relationship between foreign aid and domestic savings does exist, which is proved by three widely used cointegration techniques. The bivariate and trivariate causality analysis also confirmed a significant positive causality stemming from foreign aid to domestic savings. The results of sensitivity analysis also gave a robust confidence on the initial findings.