The Saving-Investment Nexus: Why it Matters and How it Works

The causal relation between saving and investment has momentous implications for fiscal policy. If saving causes investment, this lends support for policies of fiscal austerity. Neither the national income accounts nor economic theory can resolve issues of causality. This paper presents a VAR analysis that examines the saving - investment relation. The principal findings are that investment spending is negatively impacted by personal saving and independent of government saving. Increases in personal saving have a negative effect on government saving. These patterns are consistent with the Keynesian paradox of thrift.