Data and Methodology

In order to answer the research question, data has been compiled from the World Bank. The type

of data used in this investigation is panel data. Panel data combines the characteristics of time-

series and cross-sectional data into one, making it a multidimensional dataset. As such, important

aspects of panel data include the number of observations (n) on differing individuals (ranging

from i=1,…,n) observed over the same time at equal intervals, with T denoting the times the data

set is observed. Unfortunately, some countries have incomplete data for some of the variables

used in this analysis, making this panel unbalanced. In order to resolve this issue, some variables

have been excluded from the analysis and some gaps in the data have been interpolated, by

which a gap of one or two data points have been filled by the previous year’s figure in order to

prevent the software (STATA) to exclude that particular variable or country from the analysis on

the grounds of incompleteness. Another characteristic of this dataset is that it follows the same

individuals (countries), making it a fixed panel. As such, the dataset under investigation is a

fixed and balanced (if interpolated) set of panel data (Greene, 2011).

This particular dataset comprises data of 8 SAARC countries over a time span of 37 years; from

1980 to 2016. As this also paper investigates .This prerequisite forms a restriction on the

countries that can be investigated, as data is not available for the different variables fundamental

for this investigation for every country. As such, the selection of countries is largely based on the

availability of the relevant data. The 8 countries evaluated in this paper are: Bangladesh, Bhutan,

India, Nepal, Pakistan, Sri Lanka, Afghanistan and Maldives.

The analysis of debt and aid impact on domestic saving indicates that the dependent variable is

domestic saving, while debt is one of the explanatory variables. Other independent variables in

the regression model are:

 Trade (% of GDP)

 Population growth (annual %)

 Inflation, consumer prices (annual %)

 Net ODA received per capita (current US$)

 Gross domestic savings (% of GDP)

The regression equation based on the response variable and listed explanatory variables can be

written in a form

DS it =α + β 1 it DEBT + β 2 it AIDCA+ β3 it CPI + β 4 it POPG+ β5 it TRAD+ ε it

Methodology:

This research basically used fixed-effects and random-effects model in order to eliminate

endogeneity problem in the panel observation which may have been caused by factors

identified in (i) above as there is tendency of unobserved variable which may have formed part

of residual and correlate with one of the regressors in the model.

The pooled OLS model estimation may be inconsistent and bias as it accepts that the

intercepts of all countries are the same. Thus it denies the heterogeneity or individuality effect

that may exist among the countries in the panel observation.

The fixed-effects model allows for heterogeneity or individuality effects between countries in

the panel observation and hence each has its own intercept value. It accounts for the fact that

though intercept may differ across countries but does not vary over time.

A typical fixed-effects model or Least Square Dummy Variable (LSDV) model that takes care

of time-invariant individual effect in residual is as follows (as stated in Qian 2014, p.25):

𝒀𝒊𝒕 = 𝑿′𝒊𝒕𝜷 + 𝒖𝒊𝒕 4.1

Where 𝒊𝒕 = 𝝁𝒊 + 𝒗𝒊𝒕. Extensively the model takes the following form:

4.2

Where is a time-invariant individual effect for country i (omitted or unobserved variable) that

may be correlated with one of the regressors and 𝒗𝒊𝒕 is the idiosyncratic error and is
′
uncorrelated with .
𝒊𝒕

However, this research chooses to resolve endogeneity problem through alternative fixed-

effects method to LSDV called ‘’within transformation or within estimator’’ due to the fact

that it will be difficult to include large number of dummies for every country in the panel

observation. This is done by demean equation 4.3 and this will average all the components in

the model (Qian 2014, p.27):

4.3

Where . Hence, by subtracting equation 4.3 from 4.2, the unobserved heterogeneity

factor causing endogeneity problem is eliminated as follows:

 4.4

Hence, using E-View software, dummy variables will be automatically added in order to

absorb unobserved heterogeneity factor, The equation 4.4 above then becomes a demeaned

equation suitable for fixed effect within estimator as follows (Söderbom 2011, p. 8;

Schmidheiny 2011, p.8):

4.5

Random-effects model also identifies time-invariant effects but with common intercept value

which resulted to a very important assumption upon which random effect approach could be

consisted and free from bias estimation. The assumption is that unobserved heterogeneity

variable, 𝝁𝒊 is uncorrelated with regressors, and idiosyncratic error, 𝒗𝒊𝒕. Hence, a typical

random-effects model takes the following:

𝒀𝒊𝒕 = 𝜷𝟎 + 𝑿′𝒊𝒕𝜷 + 𝒖𝒊 4.6

Where 𝒖𝒊𝒕 = 𝝁𝒊 + 𝒗𝒊𝒕 as in fixed-effects model but since there is common intercept value 𝜷𝟎 for

all the countries in the model hence, eliminating unobserved heterogeneity variable 𝝁𝒊 will be

impossible. However, if the random-effect assumption that 𝝁𝒊 is independent of 𝑿′𝒊𝒕 and

idiosyncratic error, 𝒗𝒊𝒕 as noted before, then RE will produce consistent estimates.

4.7 Econometric Specification

In econometrics modelling, there are many models available for. However, the choice of a

particular model depends on whether that model is adequate to capture the objectives of the

researcher. For the following objectives, our methodology will be based on the following;

DS 𝒊𝒕 = 𝜷𝟎 + 𝜷𝟏aidca 𝒊𝒕 + 𝜷2debt𝒊𝒕 + 𝜷𝟑cpi𝒊𝒕 + 𝜷𝟒popg𝒊𝒕 + 𝜷𝟓trad𝒊𝒕 + 𝜺𝒊𝒕 4.7

The above linear multiple regression is translated into a model as follows:

𝒍𝒏DS𝒊𝒕 = 𝜷𝟎 + 𝜷𝟏Aidca𝒊𝒕 + 𝜷𝟐debt𝒊𝒕 + 𝜷𝟑CPi𝒊𝒕 + 𝜷𝟒popg𝒊𝒕 + 𝜷𝟓trad𝒊𝒕 + ⋯ + 𝜺𝒊𝒕

Where 𝒍𝒏DS𝒊𝒕 represent natural log of domestic saving for i individual country at specific t

time period and 𝜺𝒊𝒕 is error term. All other variables remain as described in previous page.

There was two separate categories of panel model (using fixed-effects and random effects

regression techniques) for both developing and developed countries. The Hausman test then

applied in order to compare and choose appropriate and efficient estimate between fixed-

effects and random-effects in each of the model category (Dewan and Hussein 2001, p.28;

Tvartani 2007, p.5).

A cross section analysis was also carried out for developing for the last thirty seven years of

the sample years (i.e. 1980-2016) in order to examine the efficacy of cross section regression

technique and panel regression technique.