Estimating Savings and Growth Functions in Developing Economies: A Simultaneous Equations Approach

There is a two-way influence between the savings rate on the one hand and some of its determinants on the other (i.e. a problem of simultaneity exists). This study specifies a general production function to generate a growth rate function, and estimates savings and growth equations simultaneously. A Hausman specification test examines the correct system specification, and determines whether 2SLS or 3SLS is the appropriate estimation technique. The results show that a simultaneous equations model is a better estimation technique (2SLS or 3SLS) than a single equation system (OLS), and that the full-information method (3SLS) provides better estimates than a limited-information method (2SLS). [C30]