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Interest Rates and Financial Savings in Tanzania: 1967 - 2010

Ndanshau, Michael O. A. and Kilindo, Ali A. L. (2012): Interest Rates and Financial Savings in Tanzania: 1967 - 2010.

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Abstract

This paper investigates responsiveness of financial savings to real interest rate and other determinants in Tanzania during the period 1967-2010. Both OLS method and dynamic error correction model (ECM) approaches were employed in the time series data analysis. The regression results shows that real interest rate exerts a statistically significant and positive short-run and long-run effect on financial saving in Tanzania. Moreover, both contemporaneous and two-period lagged real interest rate has the expected significant positive effect on financial saving. Unexpectedly, the results show that the effect of both nominal interest rate and inflation on saving is positive as predicted in theory. Among other determinants of saving, the effect of real income per capita is significant and positive as expected but not that of financial development. Several robustness tests confirmed the estimated sign and sensitivity of financial savings to the real and nominal interest rates during the sample period. Among others, the results are in support of the interest rates liberalization policy and real interest rate strategy used to enhance saving in Tanzania.

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