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Quarterly Journal of Econometrics Research

June 2016, Volume 2, 1, pp 17-27

Examining Long Run Relationship between Household Debt and Household Savings in South Africa – An Error Correction Model and Granger Causality

R Ncwadi

,

Kholiswa Malindini

R Ncwadi 1

Kholiswa Malindini 2

  1. Head of Department, Department of Economics, Nelson Mandela Metropolitan University, Port Elizabeth, 6031, South Africa 1

  2. Lecturer, Department of Economics, Wits School of Governance, University of Witwatersrand, Johannesburg, South Africa 2

Pages: 17-27

DOI: 10.18488/journal.88/2016.2.1/88.1.17.27

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Article History:

Received: 13 July, 2016
Revised: 17 August, 2016
Accepted: 26 September, 2016
Published: 25 October, 2016


Abstract:

Savings is vital to maintain and expand an economy’s capital structure and economic growth. Saving is an important component of economic growth model in that investments are created from savings. Investment allows an opportunity to improve technology and thereby increasing levels of productivity.  Increasing levels of productivity lead to increased real wages. The end result of increasing real wage is improvement of the welfare of the nation. Nevertheless, savings have been declining over the years, placing the South African economic development agenda in jeopardy. Since 1984, savings have deteriorated significantly, reaching a mere 15.3 percent of GDP in 2009 (SARB, 2010). The decline in savings at the beginning of the 1980s coincided with increased access to credit by households. Alongside these developments net wealth of the households increased relative to their disposable income (South African Reserve Bank (SARB), 2002). Mutyaba (2013) states that savings declined considerably during the last decade in South Africa. In 2006, for example, savings turned negative. In contrast, during the same year the debt increased to its highest level ever Mutyaba (2013). Clearly voluntary savings are becoming even more unaffordable by a number of households in South Africa, mainly amongst the low earners (Chiroro, 2010).This study uses Engle & Granger cointegration approach and granger causality to examine the link between debt and savings in South Africa.
Contribution/ Originality
This paper makes a contribution towards the household savings discourse in South Africa. The use of Engle and Granger cointegration approach to examine the link between household savings and household debt in this paper is one of the very few studies in this area in South Africa.

Keywords:

Household savings, Household debt, Cointegration, error correction, Granger causality, Causal relationship.

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Reference:

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

All authors contributed equally to the conception and design of the study.

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