Savings and Inflation in Kenya : Testing Deaton’s Hypothesis

With a plunge in national savings due to external economic shocks, among them the financial crisis and COVID-19-related macroeconomic costs, this study investigates to what extent inflation explains the variation in the saving culture in Kenya. Available empirical works have been conducted mostly in advanced economies and hence are difficult to generalize for developing countries considering differences in social-economic conditions. Therefore, this study will investigate the impact of inflation on savings variations in Kenya. To examine how inflation explains national savings, the study used the ordinary least squares (OLS) estimation technique. From analysis findings, inflation rate, income growth and interest rate positively influence savings behaviour in Kenya. In contrast, consumption expenditure harms national savings in Kenya. From regression findings, high inflation is critical for stimulating national savings in Kenya as stated in Deaton’s hypothesis. This finding is puzzling as it contradicts the implications of most monetary general equilibrium theories. Expansionary inflation findings imply that the Central bank should bolster inflation programmes and policies to accelerate national saving growth