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
Highlights
Growth in output of an economy depends partly on accumulation of human and physical capital, which in turn depends fairly on available national savings
Drastic increases in domestic savings in the East Asian countries were achieved through the institution of financial sector reforms and the fiscal discipline which facilitated sustainable economic growth rates (Sarah, 2012)
The Augmented Dickey and Fuller (ADF) test for unit root was used because it is appropriate for small sample size
Summary
Growth in output of an economy depends partly on accumulation of human and physical capital, which in turn depends fairly on available national savings. In the case of increase in aggregate domestic savings it could reduce the country's dependency on foreign capital and foreign borrowing and loans which may lead to unsustainable foreign debts and result in balance of payment disequilibria (Ahmad et al ., 2017) This enables countries to invest on huge local debts that have highly minimal burden on servicing as compared to the external sources of investment capital (Babu et al, 2014). In most of the developing countries in Africa, foreign sources of investment funds have been constrained by the existing external debt and unpredictable foreign aid (Babu et al, 2014) This has necessitated greater attention to the mobilization of domestic savings
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