Moreover, upon replication of this procedure with levels of data, the null hypothesis cannot be rejected for all variables with the exception of the change in the nominal exchange rate. This step concludes the existence of strong evidence that all the data series robustly follow an I(1) process in levels with the exception of the change in the exchange rate that follows an I(0).

# **Cointegration Analysis**

At this stage the set of relevant variables proposed by LCH for savings behavior proposed by Modigliani & Brumbreg (1954) are considered. It is now plausible to investigate the presence of a long run equilibrium relation between real gross private savings per capita, real interest rate and m2togdp. A VAR-model in levels is considered between these three series.

# **Selecting the Lag Length**

The reliability of the findings of the VAR system of equations depends on the lag length considered in running the system. This research adopts a robust procedure to test the optimal number of lags that maximize the efficiency of the model and ensure that the feedback information is adequately and efficiently maintained within the model. The optimal lag length is tested using several criteria including (AIC), Shwartz Criteria (SC) and the Log Likelihood test. The theory proposes that quarterly data as well as the propagation of the business cycle should be considered within a 6- year period (Cotis and Coppe, 2005).

The analysis begins with a VAR system using 6 lags and then a sequential reduction process is implemented thereafter to move from a general to a specific model specifically to avoid overparameterization and ensure parsimony. Individual equations and vector misspecification tests for the reduced rank 3 lags model residuals and model stability robustly support our proposition to proceed with modeling long run and short run dynamics by adopting 3 lags and conditioning the analysis on white type noise residuals.

# **Cointegration Tests**

The cointegration analysis is employed to a 3-lags system. The presence of a co-integrating relation is identified by Johansen’s maximum likelihood estimator approach. The null hypothesis is rejected of no cointegration at 1% significance level and trace eigenvalue (������) - adjusted for the degrees of freedom – rejects the same null at 5% significance level. Table (7a) also reports that maximal eigenvalue test rejects the null at 5% for a second co integrating relation. These results means that one can confidently proceed with the analysis given the existence of a single cointegrating relation for the closed economy formulation.

# **Long-run Modeling**

The long run equilibrium relation for real gross savings per capita in Egypt is provided in equation 6. The implied long run equilibrium relationship for real gross savings per capita (rgpspc) can be outlined (see tables 5 a &b): rgpspc = 1.1317 - 0.045087 * RealInterest + 0.40821* m2gdpratio

# **Real Interest Rate**

The real interest rate negatively influences private savings in the long run in the case of Egypt; however, this interpretation should be considered with caution. As elaborated earlier, the empirical evidence on interest-rate elasticities of saving reflects the theoretical ambiguity: empirical 16