The Bivariate Relation of Saving and Investment in Malaysia: A Cointegration Analysis

CHAPTER 1 INTRODUCTION

1.1 Introduction Investment and saving both have difference meaning but they have a link to each other where they will stay dependent. Investment is the one the factor that contribute to the growth in aggregate wealth. In order to increase investment we need the increase of aggregate saving and same goes to the individual saving where they will not increase when the investment does not. It is like a vise versa of a relationship and by reducing one variable it may affect others. Therefore, investment equal aggregate saving but it is more suitable to say that aggregate saving is equal to investment. Malaysian economy has been continue expanding with per capital income rising to reach prior of the Asian financial crisis in the dynamic environment. This is because the growth has been supported by the pro-growth policies and development of many strong banking sector that is able to manage new challenges and obstacles that they are going to face. Malaysia also can be consider as a high savings country that has the potential to promote a higher level of consumption without neglecting the prospect for financing of private investment from domestic sources. We can see the statistic of the relative important of consumption in economy has been increasing from year 1998 to 2002 which is 56% to 61% of GDP. While, the saving rate has always been remained

high at 35% of GDP, is just that it has been decline from a peak of 42.4% in 1998(Tan
Sri Dr Zeti Akhtar Aziz).

The sudden boom development of the financial system has given the consumer more broader selection of financial products and services to them. Therefore they take this opportunity to make their own decision and think wisely before they make their own saving and investment. Thus this decision will have lasting implications for their own financial risk in the future which is based on their own choices. With this financial planning and management it will forecast the consumption expenses, debts, and saving of a person at a respective stage. Nowadays, the rising of the income levels has influence the household sector in Malaysia to continue accumulate more saving in the bank as to reflect the high accumulation of deposits against debts. Based on percentage of GDP we can see that the percentage is 67% which is remains high all the time. Malaysia has a stable

inflation and the cost of financing has been kept low to encourage sustained consumption and the most important is to stimulate strong investment activities in Malaysia. When the cost of financing is kept low this will promote smaller

entrepreneur to open their business and this will result in the positive effect in bank lending.

1.2 Problem Statement 1) The direction of the causality of saving and investment, where which variable affect which one. Is saving cause of more investment or investment cause more saving in Malaysia. 2) Does the relationship between the saving and investment is vice versa? Does the increase of 1% of saving may cause increase or decrease of how many percent of changes in investment?

1.3 Research Objective 1) To analyze the degree of sensitivity of investment due to the changes in saving. 2) To investigate the long run relationship between investment and saving. 3) To examine the direction of causality between investment and saving.

1.4 Significant of study This study is mainly to provide useful and meaningful information which may help household and investor to add their knowledge and know more details about the study that has been made and so improve their decision making. For household this study will show them which way that they can choose to use their money, through investment or saving. While to the investor, they can see which one may give them higher return and perhaps they will choose more toward saving because of the high interest given by the financial institution which is less risky or investment which is more risky but high return on a specific period (long term or short term).

1.5 Scope of the Study The study of this research basically is on the secondary data. The time taken is 41 years data with the current and latest data that is use which is from 1970 to 2011 based on the two variables that is use. The data of this research is using the timeline and it is based on quarterly data.

1.6 Format of the Study The format of the study is divided into five major parts which is included introduction, literature review, recommendation. For the Introduction part, it explains briefly regarding the topic of the research, problem statement, objective, and lastly the scope of the research. Chapter two which is the Literature Review where this chapter will brief the analysis of the related literature review. It is very important to have this analysis because the selected journal will show the relevant theories and concept of the study and also summarize their findings. Chapter three is the data and methodology where this part will be discuss on the type of method, data, research method, theoretical framework, and hypotheses and also the statistical test use to test the hypothesis where they are suitable or not to be used for the research and also the ways to get it. In Results and Finding of the study it will shows where the data is collect and analyst using a program. Overall it presents a complete account of data analysis and also the results of the study in a text form, table and figure. The last chapter which is the Conclusion and Recommendations part where it conclude overall of the research and some recommendation is also given to make an improvement based on the data and finding from the analysis that have been made earlier. data, and methodology, results and conclusion and the

CHAPTER 2 LITERATURE REVIEW Some studies have made on the bivariate relation of Saving and Investment on others country and they have come out with a conclusion on the relation for the both variable which has a strong effect on each other. Most of the study mainly concentration on the causality for both variable where they investigate which variable may influence to the variable where they may increase or decrease in units change. Some of the study that have made may have more than two variable in their research but they aim is almost the same to study the relation of the saving and investment using difference type of methods that may vary for others research and the results may have a bit significant.

The study made by Sinha.D(2002) on 1948-1999(Yearly data) using Unit root test, Cointegration test, and Granger Causility and the variable is saving and investment. He found out that the two Asian countries, namely Japan and Thailand show a long run relationship between saving and investment rates. By using the structural breaks into account, they find two variables to have long run relationship for Myanmar and Thailand. In a short run dynamics of the relationship between the two rates, they examine the impulse response function. Granger causality test taking structural break into account for the growth rates of the two variables show that the causality flows from the growth rates of investment in Malaysia, Singapore, Sri Lanka and Thailand. The reverse causality is found to hold for Hong Kong, Malaysia, and Singapore.

Kasuga.H(2004) done a study on the Domestic investment, domestic saving and GDP. The study is on the OECD countries from 1940 to 1980(Annually data) using the method Feldstein-Horioka puzzle, estimated coefficient, Vecm and Vars. They found that clear evidence that countries with developed primary equity markets have larger saving investment correlations. The results suggest that, if domestic saving increases net worth ,it increases domestic investment; the impact of domestic saving depends on financial systems and their development. The influence of financial systems on the estimation can explain lower savinginvestment correlations in developing countries, most of which have bank-based and/or relatively inefficient financial sectors. In they view, the estimated coefficient of saving on investment reflects the effect of net worth in the presence of domestic capital market imperfections caused by agency problems, the savinginvestment correlation can be explained by domestic capital market imperfections, and should not be interpreted as the measure of capital immobility.

Kim Henry.S (2001) using the method Cointegration analysis, Unit root analysis, ADF test, Philips test and regression coefficient studying on the saving and investment relation from year 1953 to 2006 based on yearly data. The area of study is at Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Portugal, Spain, Switzerland, UK and USA. From his finding he stated that the conventional aggregate shocks cannot fully explain the high savinginvestment correlation. Even after controlling for productivity, fiscal and TOT shocks, the saving-retention coefficient remains well above zero. Second, he confirms the significant role of global shocks in explaining the high savinginvestment

correlation. The saving-retention coefficients drop more with global shocks than with domestic shocks in all cases. The saving retention coefficients however remain positive. Finally, country differences in the size of the GNP and the non-traded sector do not explain the high saving investment correlation contradicting the simulation results in Baxter and Crucini (1993) and Tesar (1993). He concludes that the savinginvestment correlations puzzle remains unsolved. One possible explanation is that cyclical shocks other than the three shocks considered in this paper are responsible for the continued high Savinginvestment correlation.

Research by Chakrabarti.A(2006) for the 126 countries using the Multivariate heterogeneous panel and Cointegration analyses studying on the National saving, Investment, Balance of payment, Real interest rate, stochastic shocks and GDP from year 1960 to 2000(Annually data). Over the last three decades, a large and growing divergence in savings rates across countries has emerged. The gap between the savings rates of the industrial and developing countries has widened since the mid-1970s, this divergence is reflected in the growth performance as higher savings rates are associated with higher income growth. Apart from any direct effect on growth, an adequate supply of savings should be a central policy objective for economic stability. A national savings rate that is broadly in line with investment needs reduces the economys vulnerability to unexpected shifts in international capital flows. In conditions of increasing international financial integration, high domestic saving contributes to macroeconomic stability, although it cannot provide full insurance against the consequences of unsustainable exchange rates or fragile financial systems.

Singh.T (2008) had study on the Domestic saving and Investment relation using the Cointegration, Single- equation and System estimator, bi-variate model of Feldstein and Horioka (1980), unit root test, Granger Causality method in India from 1950-1951 to 2001-2002 on annually data. He found out that the conventional and new CUSUM tests show the long-run stability of equilibrium residuals and reinforce the cointegrating relationship between the model series. The long-run slope parameter on saving is significantly different from zero, but not from one. These results support the FH hypothesis and suggest the imperfect mobility of capital and home-bias in the asset portfolio of domestic investors. The stylized evidence showing high savinginvestment correlations are with consistent the observed behavior of saving and investment. The heavy reliance of investment on domestic saving also reinforces the `Lucas Puzzle` on the lack of capital flows from the developed countries to the developing countries with scare capital and higher marginal product of capital.

Study made by Eslamloueyan.K and Jafari.M (2010) in Mongolia, Bahrain, United Arab Emirates, Japan, Kuwait, Hong Kong, Singapore, Saudi Arabia, Indonesia, Tajikistan, South Korea, Sri Lanka, Malaysia, Uzbekistan, China, Oman and Thailand, Bangladesh, India, Iran, and Pakistan on the domestic saving and investment. They used the Cointegration, bi-variate model of Feldstein and Horioka (1980), unit root test, Granger Causality method for a period of 1990- 2006 on annually data. They come out a with a result that the estimation results suggest that there are long-run equilibrium relationships between domestic saving and investment in all three groups. Furthermore,

the estimated short-run coefficients are significant for all groups of Asian countries. The estimation results indicate that the degree of capital mobility is the lowest for the least open group. They also observe that the most open group has the lowest speed of adjustment towards long run equilibrium and hence the highest degree of capital mobility. In addition, their finding confirms the prediction of modern open economy macroeconomic theories models that allow the possibility of short-run divergence between domestic saving and investment. They also find out that more openness to trade implies greater capital mobility in Asia. Their result confirms the findings of BahmaniOskooee and Chakrabarti (2005) and Fouquau et al. (2008) regarding the relationship between trade openness and capital movement. They also note that there is complimentary relationship between trade in goods and mobility of capital. One policy implication of this result for the Asian countries is that openness to trade or trade liberalization can be used as a strategy to attract capital from abroad

Bahmani-Oskooee.M and Chakrabarti.A (2005) had been study on the Saving and Investment relationship using FeldsteinHorioka puzzle, Savinginvestment correlation and Panel cointegration for the non-stationary panel of 126 economies study for a period from 19602000 on annually data. The study uses recently developed techniques of heterogeneous panel cointegration in examining if national saving and investment exhibit any long run relationship. There is a significant and robust positive relationship between the ratio of gross domestic investment to GDP and the ratio of gross domestic saving to GDP. The evidence provides strong support for a systematic effect of country-size and openness on the saving investment relationship: the

relationship is significantly stronger among the group of high-income countries than it is for the group of low-income countries and among the group of closed economies than it is for the group of economies that were open after initial closure.

Kim.S, Sunghyun H. and Wang.Y(2007) had studied on saving and investment relationship using the method of Savinginvestment correlation, FeldsteinHorioka puzzle and Capital mobility at the countries of China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand from a period of 1980 to 2002(annually). In this paper, we have explored the SI correlation of East Asian countries in relation to international capital mobility. Generally, the direction of changes in the SI correlation over time is consistent with the changes in the degree of capital mobility. The SI correlation decreases as capital mobility increases over time. Additionally, the SI correlation in East Asia is always less than that in the OECD countries in all periods. This is consistent with the fact that capital mobility in East Asia is lower than that among the OECD countries. On the other hand, even after controlling cyclical shocks, the SI correlation remains positive, which may imply that the absolute degree of capital mobility is still low. Despite these findings, it is difficult to directly infer the degree of capital mobility of individual countries because the SI correlation varies greatly across countries in a country specific analysis. This cross-country may reflect either the presence of other country specific factors that are not considered in this paper or the small sample size. Therefore, the SI correlation may provide indirect evidence of a governments stance on the current account policy, whether governments

target the current account balance as their policy goal or simply allow for the current account as a residual of economic activity.

The study made by Evans.P, Kim Bong.H and Oh Keun.Y (2008) also on the Saving and Investment relation using the FeldsteinHorioka puzzle, Saving-retention coefficients, Capital mobility, Time-varying and coefficients on Argentina, Austria, Canada, Italy, Japan, Sweden, United Kingdom and United States for a period of 19732003 annually data. This study conclude that by estimates FeldsteinHorioka savingretention coefficients by using methods that allow domestic saving and investment rates to be cointegrated and the saving-retention coefficient to vary over time. The changes in the saving-retention coefficients indicate how international capital mobility has changed. They obtained the following empirical findings. First, the parameter stability of savingretention coefficient is strongly rejected. Second, capital mobility from Canada to the rest of the world appears to have long been perfect: its path for domestic investment is basically disconnected from its path for domestic saving. The result that cointegration is rejected for Canada does not indicate that Canada violates her long-run budget constraint, however. When they apply a unit-root test that permits nonlinear mean reversion in the ratio of its current-account surplus to its GDP, they find evidence of nonlinear mean reversion. Nonlinear mean reversion implies that the Canadas long-run budget constraint is indeed satisfied. Third, at the turn of the 20th century, capital appears to have been much more mobile between both Japan and the United Kingdom and the rest of world than it has been in the postwar period. Fourth, capital appears never to have been especially mobile between the United States and the rest of the

world. Fifth, the capital mobility into and out of Argentina, Italy and Sweden has risen since around 1970. Finally, the capital mobility of the countries that we consider appears not to have increased monotonically in the postwar period. Our findings therefore confirm those of Taylor (1996).

Amir Khalkhali.S , Dar.A, and AmirKhalkhali.S (2003) study on the government size (GS), investment (IY), saving (SP), current account (CA), government financial balance (SG) and the growth rate of government consumption (GC) relation b using the FeldsteinHorioka puzzle, Saving-retention coefficients and Savinginvestment correlation method for the 19 OECD countries Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, the United Kingdom and the United for a period of 1971 1999(annually). They examined the savinginvestment-deficit relationship within the context of a random coefficients model that permits the parameters to vary over time. Their period-specific results strongly support the crowding-out effect as well as the low capital mobility argument implied by the FB model for the countries as a whole. However, the strength of the crowding-out effect appears to weaken, and the degree of capital mobility appears to increase in the 1990s as compared to the 1970s and 1980s. They specific results show that the crowding out effect is generally weaker, and the degree of capital mobility generally higher for country groups with the larger governments. However, the differences appear to be most significant when we compare the country group with the largest government with all other country groups, with those differences being much more modest among the latter. Overall, our period-wise and

group-wise results indicate low capital mobility and crowding out for OECD countries as a whole. Yet, significant differences in the country specific results suggest that it is misleading to draw conclusions about crowding out and capital mobility for specific countries from the period-wise or group-wise results.

CHAPTER 3 DATA AND METHODOLOGY 3.1 Introduction This topic mainly list out all the details about the data and methodology which has been used in this research. For the data part, there is a clear explanation on the steps to collect data and where it is obtain and next the data is test and analyst. In Methodology part in an elaboration on the types of methods or test that is used to be performed in the research. 3.2 Data Data which used in this research is secondary data where there is two variables which are Investment and Saving. It is also a time series data of 41 years from 1970 until 2011 on a quarterly basis. This quarterly data is very important for the study because this will determine the long run relationship between Investment and Saving. 3.2.1 Source of Data All the sources of the data for the research were obtained from the Bank Negara Malaysia Library and Statistical Department of Malaysia.

3.2.2 Descriptive Data blank 3.2.2.1 Determinants of Variables There is only two types of variables which contributes in this research which is the dependent variable and the independents variable. Dependent variable is the variable that is to predict or to estimate while the independent variable is a variable that will provides the basis for estimation.

3.2.2.1.1 Dependent Variable In this research, the Investment will be the dependent variable.

3.2.2.1.2 Independent Variable For the Independent variable the variable will be the saving.

3.2.2.2 Relationship table used for variable selected The relationship involves the dependent variable as Investment from the independent variables which is Saving. This process is roughly to see the relationship between investment and saving in Malaysia.

Independent Variable

Dependent variable

Saving

Investment

3.3 METHODOLOGY Statistical measure or Regression is a that attempts to determine the strength of the relationship between one dependent variable usually denoted by Y and a series of other changing variables known as independent variable. The two basic types of regression are linear regression and multiple regression. Linear regression uses one independent variable to explain and/or predict the outcome of Y, while multiple regressions use two or more independent variables to predict the outcome. The general form of each type of regression is:

Linear Regression: Y = a + bX + u Multiple Regression: Y = a + b1X1 + b2X2 + B3X3 + ... + BtXt + u

Where: Y= the variable that we are trying to predict X= the variable that we are using to predict Y a= the intercept b= the slope u= the regression residual.

In multiple regressions the separate variables are differentiated by using subscripted numbers. Regression takes a group of random variables, thought to be predicting Y, and tries to find a mathematical relationship between them. This relationship is typically in

the form of a straight line (linear regression) that best approaches all the individual data points. 3.3.1 STATISTICAL PACKAGE FOR SOCIAL SCIENCE (SPSS) SPSS (SPSS 16.0) is a computer application that provides statistical analysis of data. It allows for in-depth data access and preparation, analytical reporting, graphics and modeling. SPSS (stands for Statistical Package for the Social Sciences) Text Analysis for my surveys is an ideal tool for categorizing analyze that the information obtained from them can be integrated with the rest of the quantitative survey data. This method can used to dependent variable (DV provide more descriptive statistics, including the variance, mean, Skewness, Kurtosis, the median, percentage and other descriptive statistics and information for variable.

3.3.1.1 MULTIPLE REGRESSION A regression equation expresses the linear relationship between two or more variables. In the regression analysis, the) and the independent variables (IVs) have to identify and these are usually based on a theoretical basis. The formula that will be use is:

Y=
Y Bo B1, X = Dependent variable = Constant Value = Regression coefficients = = Independent variable Residual term

0+

X1 +

So, below is the equation that is use for the regression analysis as follow:

Log Investment=
Log Investment 0 1 Saving

Log Savingt +

= dependent variable = constant value = Regression coefficient = Independent variable

= Residual term 3.4 THE HYPOTHESIS

Hypothesis can be divided into two types: The null hypothesis (Ho) The null hypothesis is a hypothesis about a population parameter. The purpose of hypothesis testing is to test the viability of the null hypothesis in the light of experimental data. Depending on the data, the null hypothesis either will or will not be rejected as a viable possibility. The alternative hypothesis (H1, H2, H3,..Hx) The alternative hypothesis is put forward. If the data are sufficiently strong to reject the null hypothesis, then the null hypothesis is rejected in favor of an alternative hypothesis.

3.5 EXPECTED OUTCOME In this study the expected outcome is to examine the causality between the relationship of saving and saving. This study also will determine whether the sensitivity is on saving or investment more. In order to see the sensitivity to change between the both variable we also look on their relationship in long run relationship.

HYPOTHESIS 1: Ho1: There are no changes in the independent variables (Saving) towards the sensitivity on Investment. Ha1: There are changes in the independent variables (Saving) towards the sensitivity on Investment.

HYPOTHESIS 2: Ho2: There is no co-integration relationship of independent variables (Saving) on Investment. Ha2: There is a co-integration relationship of independent variables (Saving) on Investment.

HYPOTHESIS 3: Ho3: There is no impact on Investment based on the independent variables (Saving) Ha3: There is positive impact on Investment based on the independent variables (Saving)

GANTT CHART
TASK/WEEK 1 2 3 4 5 6 7 8 9 10 11 12 13

Submission of RT

RT approval

Literature Review

Data and Methodology

Proposal Submission

Data collection and data entry

Analysis

Finding and conclusion

Review with advisor

Project paper submission

REFERENCES

AmirKhalkhali.S , Dar.A, and AmirKhalkhali.S (2003) Savinginvestment correlations, capital mobility and crowding out: some further results. Economic Modelling 20 (2003) 11371149 Bahmani-Oskooee.M and Chakrabarti.A (2005) Openness, size, and the saving investment relationship Economic Systems 29 (2005) 283293 Chakrabarti.A (2006) The savinginvestment relationship revisited: New evidence from multivariate heterogeneous panel cointegration analyses. ScienceDirect, p: 402-419 Eslamloueyan.k and Jafari.m (2010) Capital mobility, openness, and saving-investment relationship in Asia Economic Systems 29 (2005) P: 283293 Evans.P, Kim.B-Han, Oh.K.Y 2008. Capital mobility in saving and investment: A timevarying coefficients approach. Journal of International Money and Finance 27 (2008) 806815 Kasuga.H 2004 Savinginvestment correlations in developing countries. Economics Letters 83 P: 371376 Kaya.H Saving Investment Association in Turkey Department of Economics, Bahcesehir University Curagna Cad. Besiktas/ Istanbul, Turkey Kim Henry.S (2001) The savinginvestment correlation puzzle is still a puzzle. Journal of International Money and Finance. P: 1017-1034 Kim.S, Sunghyun H. and Wang.Y(2007) Saving, investment and international capital mobility in East Asia. Japan and the World Economy. ScienceDirect P: 279- 291 Sinha.D (2002) Saving- investment relationships for Japan and other Asian countries. ScienceDirect, p: 1-23 Singh.T (2008) Testing the Saving-Investment correlations in India: An evidence from single-equation and system estimators. ScienceDirect, p: 1064 - 1079