Saving in Presence of Volatilities in Interest Rate and Exchange Rate Devaluation

Abstract

Many developing countries have rationalized their economies in response to the liberalization of financial markets giving renewed concerns to the role of exchange rate management and interest rate deregulation. The study examined the effects of interest rate volatility and exchange rate devaluation on aggregate savings in ECOWAS using a panel group of grouped means (PMG) estimator. The study also applied GARCH/ARCH (1,1) models to ascertain volatility in interest rates amongst the countries. In Burkina Faso, Cabo Verde, Guinea, Ghana, Niger, Senegal, and Togo, holding bank savings accounts in form of demand and time deposits serves as a buffer to higher volatility in interest rates. This could be informed by increase in yearly percentage yield on a certificate of deposits for savings account holders. In Liberia, Guinea-Bissau, Gambia, Mali, Nigeria, Sierra Leone, Cote d’Ivoire, and the Republic of Benin, holding bank savings accounts in form of demand and time deposits because of higher volatility in interest rate is not a buffer compared to the acquisition of stocks and securities. Further finding from the study is that exchange rate devaluation had a negative drift on aggregate savings in all countries except Niger. This was attributed to undeveloped export sectors in these countries.