Interest rate liberalization and private financial savings in Kenya

Abstract

This paper examines whether financial savings are responsive to real deposit rates in Kenya Time series data covering the period 19S0 - 2000 was analyzed First, the time series characteristics of the data were assessed to determine whether the variables were stationary 01 not Secondly, tests for co integration were performed to determine the long run relationship of the non-stationary variables Error correction terms were incorporated ill the static model and this was estimated The findings of the study indicate that real deposit rates have a positive and significant influence Oil the financial savings lnvestment ratio, real GDP, and lagged real money balances are other factors that significantly influence financial savings in Kenya These findings seem to contribute to the debate that savings in Kenya do not respond to interest rates on one hand, and those that found that savings respond to interest rates once terms of trade .are controlled tor This study shows that once savings are disaggregated, financial savings by their nature respond to interest rates and other macroeconomic fundamentals Based on this, several policy implications..,are .... drawn with a view to encourage financial savings for the long-term growth of the Kenya's economy. First, an increase in real income will ensure that financial savings increase. Secondly, a policy that enhances investment ratio is essential since this ratio is important in determining the level of financial savings Lastly, real deposit rate or interest should be used both as a short run and long run policy variable