An Investigation Of The Relationship Between Gross Domestic Saving And Interest Rate In Namibia

ABSTRACT

The main objective of the study was to investigate the relationship between gross domestic savings and the interest rate in Namibia. It should be pointed out that the interest rate was subsumed by the repo rate. This objective is divided into two sections, namely to investigate the short and long run relationship and to test for causality between the gross domestic savings and the repo rate. The study used annual time series for the period 1981 to 2017 to test for the relationship between the stated variables using Gross Domestic Savings (GDS) as a percentage of Gross Domestic Product (GDP) investment as a percentage of GDP and the repo rate in Namibia. The Augmented Dickey-Fuller (ADF) and Phillip Perron (PP) were applied when testing for stationarity. It was found that all the series were non-stationary at levels but stationary at first difference. The Johansen cointegration test was also applied to test for a long run relationship between variables. The results show an existence of a long-run relationship between gross domestic savings and the repo rate. Furthermore, it was found that investment is not cointegrated with any of the two variables. Using the Vector Error Correction Model (VECM), the study found a short run relationship between the variables and as such the error term corrects for disequilibrium in the variables. Through the VECM the study also tested for causality, impulse response and variance decomposition. The study found no causality between GDS, repo rate and investment from any direction. These findings are contrary to existing literature; the classical and neoclassical school of thought. The deviation in the findings from the existing literature could be attributable to the high capital mobility as found in Namibia, as well as the currency peg arrangement, (Uanguta, et al., 2004). The main recommendation from this study is that the adjustment of the repo rate (monetary policy), as a remedial tool for a declining GDS should be accompanied by other savings promoting policies (lucrative investment vehicles) and incentives (increase in income, positive credit scores for saving households) to achieve the intended purpose.