On Interest Rates and Other Determinants of Financial Savings: An Empirical Investigation in Tanzania
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Date
2012
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Abstract
This paper investigates determinants of financial saving in Tanzania during the period 1967-
2010. Both OLS method and dynamic error correction (coitegration) model (ECM)
approaches were employed to test the hypothesis that the interest rate elasticity of financial
savings was positive during the study period. The regression results rejected the hypothesis
that the interest rate of financial savings was negative and statistically insignificant for the
period 1967-1986, a period that was characterised by staunch Government regulation and
control of the financial sector. Also unexpectedly, the results rejected the hypothesis that the
interest rate elasticity of financial savings was positive during the period 1987-2010, a
period that was characterized by market determined interest rates. The results also showed a
decrease in absolute size of the real interest rare elasticity of financial savings over the two
sub-sample period. Several robustness tests confirmed the estimated sign and sensitivity of
financial savings to real interest rates for both sub-sample periods. The results, however, are
inconsistent with the traditional theory and therefore demands for further empirical
investigation.
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Keywords
Financial liberalization, Financial saving, Real interest rate, Financial deepening, Interest rate spread, Cointegration and error correction model
Citation
Ndanshau, M.O., 2012. On Interest Rates and Other Determinants of Financial Savings: An Empirical Investigation in Tanzania. Available at SSRN 2142356.