INFLATION-INDUCED SAVINGS IN KENYA

Abstract

Recently most nations have been experiencing reduced gross savings due to external shocks, among them the financial crisis and coronavirus disease-related macroeconomic costs, this study investigates the role of the inflation rate in explaining the variation in the saving behaviour in Kenya. Available empirical works have been conducted mostly in advanced economies and hence are difficult to generalize for developing countries considering differences in macro economic conditions. Therefore, this study will investigate the effect of inflation on savings variations in Kenya. This study adopted a quantitative research design to analyse the effect and trend of the inflation rate on saving behaviour in Kenya. This was applied for the period 1975-2020 using
secondary data and the ordinary least squares (OLS) estimation technique. From the regression findings, inflation rate, income growth and interest rate positively influence savings behaviour in Kenya. In contrast, the high consumption rate harms national savings in Kenya. From regression results, high inflation is critical for stimulating national savings in Kenya. This finding is puzzling as it contradicts the implications of most monetary general equilibrium theories. Expansionary inflation findings imply that the Central Bank of Kenya should bolster inflation programmes and policies to accelerate national saving growth.

Keywords: Inflation, Savings, General Equilibrium Theory