Abstract

The purpose of this study is to test fundamental relationship between domestic saving and domestic investment for Pakistan from 1972 to 2008. Saving and investment are closely related to highlight the economic state of affairs of a country. Saving is a strapping source to enhance investment. Raising income enables people to increase consumption and saving levels. The higher the level of income will improve the level of saving and ultimately investment will go up. Johanson co-integration shows that there is a long run relationship between saving and investment. For short run dynamics and causality, the study utilizes vector error correction model (VECM). The results of VECM indicate that there is short and long run causal relation between saving and investment.

Key words: Feldstine-Horioka, foreign direct investment (FDI), Johanson co-integration, Pakistan.