Saving, Investment and Economic Growth in Iran: Results from ARDL Model and Cointegration approach with Structural Breaks

Goal: Economic growth has been considered as one of the most important development indicators for analyzing the level of community welfare and economical status. Explaining the relationship between saving and investment with economic growth can play a crucial part in regulating and codifying macro-economic policies. These relationships depend on absence or presence of structural breaks, could alter considerably. Therefore, regarding structural breaks in empirical analysis is very crucial and disregarding them could lead to unreliable and misleading results.
In most of the existing studies in the Iranian economy, the problem of structural failure in data and patterns has received little attention and it can be argued that in examining the long-term relationships between variables, this issue is almost neglected. Even in the case of attention, the fracture points are assumed to be exogenous, which is distinguished from other studies in relation to Iran's economy with these features.
In this paper, using Iran`s economic annual time-series data from 1960 to 2016, we aim to analyze the relationship between saving and investment with economic growth in terms of structural breaks. In doing so, Zivot & Andrews unit root test (1992) and Lumsdine & Papel unit root test (1997) have used to determine structural changes time endogenously and also Saikkonen & Lutkepohl (2004) co-integration test is applied for analyzing the long-term relationship between saving and economic growth with a focus on structural break. For estimating the model the ARDL method is used.
In this research, the existence or absence of meaningful relationships between investment, savings and economic growth has been investigated and for estimating the model, the ARDL econometric method has been used in which livestock variables are included for the Islamic Revolution and imposed war.The consistency and recognition tests (Cusum and CusumQ) have been used to determine the model stability and to determine the structural stability.
The results of the research show the stationary of the variables with the degree of cointegration (I) and the existence of a long-run equilibrium between savings, investment and economic growth in Iran in terms of structural failure. According to the ARDL method, gross national income and gross fixed capital formation have a meaningful and positive relationship with economic growth, in line with theoretical expectations. Thus, a one percent increase in savings and investment will increase economic growth by 0.16 and 0.15 percent respectively.
The coefficient (ECM) in the affirmation pattern of estimated model error in the economic growth function is statistically significant and indicates a strong relationship between short-run and long-run relationships. In addition, as the F statistic boundary test is co-integrated, as the coefficient (ECM) is meaningful it indicates the existence of a long-term relationship that is consistent with Gregory-Hans..en and Saikkonen & Lutkepohl tests. The suggestions of this article can be stated as follow.
First, applying active policies to encourage investment and directing savings to investment leads to economic growth. Second, establishing discipline and security in the monetary and financial markets of the country in order to prevent fluctuations of inflation and exchange rates in domestic markets for increasing the willingness and confidence of investors to invest.
Third, the reciprocity is aimed at investing and increasing deposit rates in commercial banks through monetary policies that are available to the central bank in a way that encourages people to increase their savings and deposits to the banks. And finally, providing low-level facilities and improving the business environment and the necessary support from investors to implement projects will lead to post-sizing of people towards productive investment and economic growth.
Increasing the degree of openness of the economy, which requires accelerating trade, tariff reform and accelerating customs duties, will increase the willingness to invest and attract investment.