The Casual Relationship between Household Savings and Economic Growth in Bahrain

Abstract

This study aims to examine if neoclassical theory of growth is hold for Bahrain as an open economy employing Cointegration, Vector Error Correction and Granger Causality over the period of 1999-2014. Even though Cointegration test indicates the existence of a stable long-run equilibrium relationship between household saving and economic growth, Granger causality reveals that significant unidirectional causality runs from economic growth to household saving. This is contrary to the neoclassical theory of growth that causality runs from savings to economic growth. This is evidence that the theory does not hold in Bahrain during the period studied. Therefore, it might be suggested that household saving does not seem to play a major role in contributing to Bahrain’s economic growth. This may be due to the fact that some other reasons bringing about savings unproductive.