Journal of Applied Finance & Banking

Economic Growth, Financial Depth and Savings Nexus in Saudi Arabia: An Empirical Investigation

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  • Abstract

    This research article empirically examines the causal relationship among financial depth, economic growth and savings in the unique economic setup of Saudi Arabia for the period of 1971 to 2011. The study intends to determine the directions of causality between financial depth and economic growth and its effect on each other, where savings is introduced to the model in order to observe the relationship in a tri variable framework. Although Johansen and Jueslius test for co-integration found no long run co-integrated equations among the variables but the Granger Causality and Wald Test establishes the relationships among the variables using Vector Auto Regression (VAR) model. Outcomes of the study imply that both saving and financial depth causes economic growth in Saudi Arabia, whereas there is a unidirectional causality between financial depth and saving. The findings are further validated by Impulse response Function and Vector Decomposition analysis. The results show that financial depth is an important component to consider which triggers both, savings and economic growth in the country. The outcomes of the study are in agreement with the government efforts to strengthen the financial base of the economy in order to reduce its dependency on oil.