Effect of Fiscal and Monetary Policy on Gross Domestic Savings in Kenya

Abstract

Domestic savings is a vital source of investment funds, especially for developing economies. It is thus essential that internal savings capacity in these economies is increased to enhance investment financing and economic growth. Since increased reliance on external capital flows can result in economic instability, achieving a higher national saving rate is a critical macroeconomic objective for many developing countries. However, domestic savings remain low in many of them including Kenya, posing a serious development challenge. Fiscal and monetary policies have been a major focus by governments in trying to improve on gross domestic saving. The main purpose of this study was to analyze the role of fiscal and monetary policy on gross domestic savings in Kenya. This study was informed by the theory of Life cycle hypothesis. The study utilized explanatory research design. Yearly time series data was sourced from Economic surveys, World Bank reports and Statistical abstract of the period between 1990 and 2017. The time frame was viewed as the economic reform period; this was started in the country in the 1990s. Johannes co-integration methods were applied together with its vector error correction estimation approach to determine coefficients that define the relationship between variables under study and the gross domestic savings. Augmented Dickey Fuller test was applied for unit-root test. The results obtained from the regressions were spurious free. The regression result revealed that monetary and fiscal policy variables explained domestic savings in Kenya. The study recommends that monetary and fiscal policy implemented by the government should promote a favorable investment atmosphere through appropriate stabilization of lending rates, inflationary rates, and promoting income growth to ensure increase in national savings for economic sustainability in Kenya.

Keywords: Savings, Investments, Fiscal Policy, Monetary Policy, Life Cycle Hypothesis, Economy

DOI: 10.7176/JESD/13-2-05

Publication date: January 31^st 2022