Rate of Interest, Financial Liberalization & Domestic Savings Behavior in Pakistan

Abstract

The study analyzes long run and short run association among the real rate of interest on deposits, financial liberalization, economic growth, terms of trade, real remittances by Pakistani emigrants and domestic savings behavior in Pakistan, using annual time series data for 1973-2007. ARDL Bounds Testing Approach has been applied for co-integration. To test integration order of the variables, DF-GLS and Ng-Perron Tests have been employed. The results reveal that the real interest rate, financial liberalization and economic growth positively affect domestic savings in Pakistan in the long run. The co-efficient of liberalization dummy is also positive and statistically significant, suggesting a need for increased liberalization and deregulation of interest rate for mobilization of savings. Conversely, the terms of trade and real remittances by Pakistani emigrants show negative relationship with domestic savings, supporting Complementarity Hypothesis of Mckinnon-Shaw (1973).

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