Private Saving Behavior and Ricardian Equivalence Theorem: The Case of Tanzania

Abstract

The determinants of private savings in Tanzania for the period 1970-2005 are investigated, with emphasis on how the Ricardian Equivalence Theorem explains private saving behaviour in Tanzania. The relevance of this theorem was examined using two different empirical models. In Model 1, the theorem was tested using government budget deficit; in Model 2, the net revenue from the sale of bonds was used. The results varied between the two models. In Model 2, the theorem was found to hold both in the short run and long run; whereas for Model 1, it was found not to hold. Thus, based on the results of Model 2, the main determinants of private saving include budget deficit, inflation, liberalization of the financial sector and per capita income; however, liberalization of the financial sector was found to be statistically significant only in the long run.