Inflation and Saving: A puzzle

Abstract

In the wake of the steep fall in the national savings due to economic shocks, among them the COVID-19 pandemic macroeconomic consequences, this study examines to what extent inflation explains the variation in the saving behavior in developing countries. Most past empirical studies investigated the role of inflation on savings only in advanced nations. The current study will investigate the effect of inflation on savings culture in Kenya. To determine how inflation explains saving, the study uses the ordinary least squares(OLS) estimation technique. From regression analysis findings, savings are positively related to inflation, economic growth, and interest rate. In contrast, consumption expenditure is negatively related to national savings. From estimation results, in Kenya, high inflation will stimulate further growth in the national savings. This finding is puzzling as it contradicts the implications of most monetary general equilibrium models. Expansionary inflation result implies that the central bank should vitalize inflation, to promote a higher saving culture in Kenya.

JEL Classification: c22, e21, e31, f3

Keywords: Inflation, saving, puzzle, saving behavior, life cycle theory of savings, theory of consumer behavior

DOI: 10.7176/DCS/12-6-06

Publication date: July 30^th 2022