The Effect of Saving-Investment Nexus on Current Account Balance in Nigeria: An Implication for the Life-Cycle Hypothesis

Abstract

This paper explores the impact of both long- and short-term saving-investment nexus on Nigeria’s current account balance. It examines the relationship between domestic savings, investments and current account balance by analysing the position of selected demographic variables in Nigeria, both in the short- and long-term, using the ARDL cointegration method, and a sample period from 1980 to 2018. The study tested whether there was empirical evidence supporting the life-cycle hypothesis (LCH) in Nigeria. However, the study revealed that the coefficient of error correction was negative and highly significant, as well as establishing a long-term cointegration. The study revealed a negative sign of life expectancy; and the ratio of total age dependence was found to be statistically significant, thus indicating that a unit increase in life expectancy and the ratio of total age dependence could result in a decline in current account balance in Nigeria by 1.2796 (127%) and 6.43038 (643%), respectively. This result supported the presence of the LCH theory on saving actions in Nigeria, since people could borrow. In addition, the population growth exhibited a positive relationship with current account balance. Therefore, a unit change in the population age structure is expected to influence saving, investment and current account balance; especially with an increase in population, because the current account is, by definition, equal to the saving-investment balance.

Keywords: current account balance, domestic savings, investment, ARDL bounds cointegration

JEL Classification: E21, F32, J13