Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

Hamida Begum Abstract- The study investigates the relationship between deposit interest rate and gross savings in Bangladesh for the period 1976-2019. In this study, I used the ARDL approach to estimate the short run and long-run relationship between dependent and independent variables, which applicable if some variables are integrated of order one, and some are zero. The result of the study reveals that in the short-run impact of interest rate on gross saving is insignificantly negative, but in the long run this impact is insignificantly positive. The result also shows that both in the short- and the long-run, inflation and GDP positively impact the gross savings. Moreover, the impact of remittance on gross savings is positive in the short run and negative in the long run. Keywords: deposit interest rate; gross saving; ardl; co- integration. I. I ntroduction avings is considered as one of the influencing element for economic growth of a country. Savings increase capital formation, and capital formation is an important factor for promoting economic development. According to Harrod (1939) and Domar (1946), savings leads to investment, and it leads to capital formation, which generates economic growth. It is improving efficiency of loanable funds and promoting capital accumulation (Shaw, 1973). Sustained accumulation of capital foster the economy to achieve higher and sustainable economic growth (Chow, 1993). In the short run, saving rate determine the speed of capital accumulation and growth in the economy (Ramsey, 1928). Savings increase capital formation and investment and thereby raising the growth of the economy (Abu, 2010). Interest may function as an incentive to postpone gratification (Case, Fair, and Oster, 2012). In other word, it is the reward for postponing current consumption. Hence changes in interest rate may impact the savings such as lower interest rate is expected to stimulates current consumption and discourage savings and vice-versa. Aizenman et al. (2017) showed that the impact of the interest rate on saving is related to the capital accumulation which would determine future income level and thereby present-day consumption and saving in the long run. According to Case, Fair and, Oster (2012), “The final impact of a change in interest rates on saving depends on the relative size of the income and substitution effects.” When the substitution effect crossed the income effect, saving tends to increase as the interest rate rises. Keynes argued that interest rate does not have a significant influence on the growth of savings in households and firms as retained profits and investment (Keynes, 1936). Some empirical studies indicated that interest rate could affect the savings positively (Shaw and McKinnon, 1973; Agrawal, 2007, Masson et al. 1998, Warman (1994) or negatively (Loayza et al., 2000). The people of an economy with aging population and insufficient social protection, may want to increase their savings for precautionary purposes if the interest rate is lower. According to Fry (1998), in an economy where interest rates are kept low, this leads to a decrease in current savings. Bangladesh is an emerging economy that experienced on average more than 6 percent growth rate over the last decade. In FY 2020, during the pandemic situation, its growth rate was 5.2 percent. To expand its development, Bangladesh need to boost private investment. To increase private investment and create new jobs through industrialization Bangladesh decrease the deposit and lending rates by 6% and 9%, respectively. But the question is, what about the savings or deposit? The main objective of this paper is to know whether a lower interest rate has any impact on the saving of the Bangladesh economy? a) Purpose of the study The objective of this study is to investigate the impact of interest rate on gross saving in Bangladesh. II. L iterature R eview a) Theoretical Literature The main theories on the saving behavior are: The Relative Income Hypothesis by Duesenberry (1949), the Permanent Income Hypothesis by Friedman (1957), the Life Cycle Hypothesis by Ando and Modigliani (1963), the Buffer-Stock Theory and The bequest theory. The life–cycle hypothesis developed by Modigliani and Brumberg (1954) predicted that individual consumption decisions depend on the lifetime expected income and saving patterns. This hypothesis assumes that individuals save to smooth their lifetime consumption. Thus individuals in their lifetime first act as a dissaver when they are child, savers while working and again dissave when they retire. S Volume XXI Issue IV Version I 31 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals An Empirical Analysis of Interest Rate and Domestic Savings in Bangladesh Author: Lecturer, Department of Economics, National University, Bangladesh. e-mail: bgmhamida@gmail.com