Foreign capital inflows and domestic savings in Pakistan : cointegration techniques and error correction modelling

The present study investigates the relationship between domestic savings and foreign capital inflows in Pakistan using cointegration and error-correction modelling of handling the non-stationary time series data. Applying three different cointegration techniques, the findings in this paper indicate that there is a valid long-run inverse relationship between domestic savings and foreign capital inflows. The Unrestricted Error Correction Model found short-run significance inverse relationship between domestic savings and foreign inflows but Short-Run Dynamic Engle-Granger procedure found insignificant inverse relationship between these two variables. The empirical results support the "Substitution thesis" hypothesis. (Pak Development Rev/DÜI)