Determinants of gross domestic savings in Kenya

Abstract

This study examined the major determinants of gross domestic savings rate (GDS) in Kenya using secondary annual data for the period 1971-2012. The macroeconomic variables used include economic growth, real per capita income, deposit interest rate, M2, public savings and current account balance. The model was estimated using co-integration and errorcorrection models to analyze the short and long run equilibrium among the variables. The ADF test shows that most variables contained unit root at levels except economic growth. However, all variables were stationary after first difference. Results of the study show that current account deficit, public savings and real per capita income play a significant role in determining the gross domestic savings in Kenya in the long-run. The coefficient analysis also shows that real per capita income gives a positive impact while the current account deficit, public savings, rate of interest on deposits and broad money (M2) show negative impact on domestic savings in the long run. The study also concludes that the speed of adjustment is 63% which means that the model will correct short run disequilibrium position at the rate of 63% annually. The study also finds unidirectional causality which runs from economic growth (GGDP) to gross domestic savings (GDS). The paper concludes that there is a potential for increased domestic savings and this calls for policy changes and political will among policy makers who should put more emphasis on current account balance, public savings, per capita income and economic growth that influence savings.