measures of the financial sector reforms include (i) the cost of capital approximated by the real interest rate, (ii) the volume of intermediation measured by the ratio of M2 to GDP, and (iii) the effectiveness of financial intermediation proxied by the ratio of reserve money to total deposits and reserve money to quasi-money, with a decrease in the ratios indicating a growing efficiency of the banking system in mobilizing deposits. The model is estimated for the entire period between 1976-1999, the pre-reform period between 1976-1990, and the reform period between 1991-1999. For the entire period, among the financial intermediation variables, the study finds that reserve money in percent of total deposits is the only significant variable. This was reflective by the dominance of “forced savings” and rationing, as well as the importance of the public sector. For the pre-reform period, among the financial intermediation variables, the reserve money in percent of total deposits and credit to the private sector are significant. During the reform period, all the financial intermediation variables proved to be significant (with the exception of M2/GDP). This suggests that after the reforms the savings ratio became more responsive to changes in the effectiveness of the financial intermediation. The author concludes that as market-based financial systems are established, higher real returns on savings, greater efficiency of the financial system, and a larger share of resources intermediated through financial institutions all contributed to higher savings.

Hussein (2002) examines the impact of financial liberalization proxied by the expected real interest rate on financial savings in Egypt over the time period 1967-1996. The study used the autoregressive distributed lag (ARDL) procedure developed by Pesaran, Shin, and Smith (1995, 1999) and Pesaran and Shin (1999). The study concludes that interest rates have a positive impact on financial savings; nonetheless, the magnitude of the interest elasticity of financial savings in Egypt is statistically too small. In other words, an increase in the interest rate by 1% causes a meager increase in financial savings by 0.08% and 0.04% in the long and short term, respectively. Furthermore, real per capita income and expected inflation rate have a positive effect on financial savings in the long run. Lastly, Hussein concludes that an increase in the real rate of interest is neither the most logical nor feasible path for the pursuit of the development and enhancement of the financial sector in Egypt.

Elsayed (1993) studies the determinants of savings in Egypt, and the factors that contribute to the rising savings rates from 1969-1990. Her study focuses on the determinants of domestic savings (gross and private) using stepwise regression. It examines the following determinants: real per capita income, inflation rate, per capita cash balances (money, quasi money, and saving deposits), nominal and real interest rates on one-year deposits, unemployment rate, and international trade rate. Elsayed finds that savings is determined by income, and it is negatively correlated with the unemployment rate and interest rate. On the other hand the effect of inflation is undetermined. She concludes that implementing the government economic reform policies that liberalized the interest rate since the 1980s in addition to the economic regression Egypt was witnessing would lead to a further decline in saving rates.

# **Econometric Methodology and Modeling Strategy**

This paper builds on earlier research by Hussein and Mohieldin (1997) that examines the stability of the long run relationship between the real interest rate and the following savings indicators: (i) financial saving, (ii) total saving, (iii) private investment, as well as (iv) real economic growth in 7