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