Empirical Investigation of the Determinants of Tanzania’s National Savings

Abstract

Understanding the nature of national savings behavior is critical in designing policies to promote savings and investment which in turn enhance economic growth through capital formation.This paper empirically examines the determinants of savings in Tanzania for the 1970-2010 period.The conceptual framework for the paper is derived from the life-cycle/permanent income hypothesis.Augmented Dickey Fuller and Phillips-Perron tests are used to test stationarity of all time series.To test long-run relationship of the variables, Johansen test is applied.The results reveal that disposable income, real GDP growth, population growth and life expectancy have a positive impact on savings in Tanzania.The results also reveal that inflation, has a negative impact on national savings.Furthermore, the paper establishes the direction of causality between national savings and economic growth.The results on this causal relationship suggest that real GDP growth causes national savings and not otherwise.This implies that that policies geared towards real GDP growth rate should be given first priority if the national savings trend is to be enhanced over time.Furthermore, from a policy point of view the precautionary motive for saving is not supported by the findings as inflation which captures the degree of macroeconomic volatility has a negative impact on savings in Tanzania.

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