Interest Rate Sensitivity of Savings: The Ghanaian Experience

Abstract

The study sets out to examine the sensitivity of savings to interest rate in Ghana during the period 1970 to 2006. In line with this objective, a theoretical model of savings function was specified with real interest rate as the main independent variable. Other independent variables included real income, inflation rate and real foreign savings. The specified error-correction model was estimated by the Ordinary Least Squares (OLS) method based on Engel and Granger two-step estimation approach. Both the long-run cointegrated results and the short-run results have revealed that the interest rate is a significant determinant of savings in Ghana. The policy implications are that, the Ghanaian financial policy authorities should try hard to maintain realistic interest rates that can attract the idle funds into the banking system to be used by prospective investors. Similarly, since the level of real interest rate and hence the rate of return on funds is affected by the inflation rate, the Bank of Ghana must continue to make further efforts to reduce the level of inflation in the country.