Interest rate dynamics on savings: Evidence from Sri Lanka

Economists believe the interest rate is an interim agent for savings, which promotes the people to lose their present consumption continuously. So, this study also assumed that there was a relationship between the interest rate and savings. Based on that, the objective of this study was to explore the interest rate dynamics on savings in Sri Lank over the period of 1977 to 2017. In this study annual time series data for the following variables: interest rate, savings, and gross domestic product were used, and the Johansen and Juselius cointegration technique was employed to test the cointegration relationship between the variables. In this study, interest rate was considered as key independent variable and savings was dependent variable. Both Augmented Dickey-Fuller (ADF) and Kwiatkowski – Phillips – Schmidt – Shin tests were employed to test the stationarity of the variables. In terms of these tests, all variable were stationary at first difference level. Furthermore, interest rate and savings had the long run relationship and there was short-run causality between interest rate and savings which was confirmed by the results of Vector Error Correction model (VECM). Therefore, the interest rate had long - run and short - run relationship on the savings in Sri Lanka. Finally, this study recommends the policy makers should consider interest rate friendly policy to boost the savings in Sri Lanka.