Impact of Interest Rate Deregulation on Gross Domestic Savings in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue XII, December 2021 | ISSN 2454–6186

Impact of Interest Rate Deregulation on Gross Domestic Savings in Nigeria

Mathias A. Chuba
Department of Economics, Achievers University Owo, Km 1, Idasen-Ute Road, P. M. B. 1030, Ondo State, Nigeria

Abstract: Nigeria embarked on interest rate deregulation in August, 1987 in order to increase gross domestic savings through an increase in interest rate. The results of previous studies with respect to the impact of interest rate deregulation on gross domestic savings in Nigeria are mixed. This paper argues that interest rate deregulation does not have positive impact on gross domestic savings in Nigeria because savings depends on income rather than interest rate. The main objective of this paper is to determine the impact of interest rate deregulation on gross domestic savings in Nigeria from 1970-2019 using a dummy variable regression technique. The result of the investigation indicates that interest rate deregulation has an insignificant negative impact on gross domestic savings in Nigeria. The gross domestic product has a significant positive relationship with gross domestic savings in Nigeria. The Keynesian proposition that savings are mainly determined by income rather than interest rate is applicable in Nigeria. The classical theory of interest rate and the theory of high interest rate policy that was popularized by McKinnon (1973) and Shaw (1973) are not applicable in Nigeria. The target of economic policy should be gross domestic product and not interest rate because naturally gross domestic saving will increase if gross domestic product increases in Nigeria.

Keywords: Deregulation, Interest Rate, Savings, Dummy Variable Regression Model, Nigeria

JEL Classification: C01, E21, E43

I. INTRODUCTION

In classical view, the interest rate is the incentive for saving. That is, by saving now, individuals can earn interest and accumulate larger sums of money to spend in the future. When the interest rate rises, the incentive to save increases and so the quantity of saving increases. When the interest rate declines, the incentive to save declines and so the quantity of saving declines (Amacher and Ulbrich, 1986). McKinnon (1973) and Shaw (1973) are in support of the classical view because they argue that high interest rate increases savings and interest rate falls when savings increases, thereby induces greater investment. On the other hand, Keynes (1936) believes that savings is mainly determined by income rather than interest rate. This paper argues that an increase in interest rate cannot bring about an increase in savings if it is not accompanied by an increase in income. Savings reduces when income is falling even though the interest rate is rising. The households will increase savings when their incomes are rising in order to accumulate money for investment, retirement, inheritance and unforeseen contingencies even though the interest rate is falling. In other words, savings depends on income rather than interest rate.

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