In addition to this study of cyclical behaviour, we test for the presence of a long run trend relationship

Cooray and Flemingham, International Journal of Applied Economics, 5(1), March 2008, 48-53 48Are Australia’s Savings and Investment Fractionally Cointegrated? * **Arusha Cooray and Bruce Felmingham University of Tasmania, Australia Abstract This paper uses an Autoregressive Fractionally Integrated Moving Average (ARFIMA) process to determine if Australia’s savings and investment are fractionally cointegrated. The study finds the two series to be fractionally cointegrated implying that deviations from equilibrium are persistent. Keywords: Australia, savings, investment, long memory, fractional cointegration JEL Classification: C22, C32, E21, E22 1. Introduction This paper applies an Autoregressive Fractionally Integrated Moving Average (ARFIMA) process to determine if gross investment (I) and gross savings(S) in Australia are fractionally cointegrated. In the recent past, Australia’s gross savings has fallen short of gross investment giving rise to a policy debate on the question of the adequacy of saving in Australia. The general view is that Australia’s national savings is low by international standards. The outcome of this ARFIMA study given the presence of a long run relationship between these macroeconomic aggregates will help address these policy related issues. The chosen methodology for this analysis is the ARFIMA process. This is chosen because many economic time series exhibit a high degree of ...