Investigating the Impact of Interest Rate on Domestic Private Investment in Ghana

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The study investigated the impact of interest rate on private investment in Ghana for the period 1970 to 2015. To achieve these objectives, the study test for stationarity using the ADF test and the ARDL estimation techniques in the analysis. The long run results showed that interest rate positively influenced private investment. GDP was also found to impact positively on private investment while inflation, exchange rate and FDI were found to exhibit negative and significant impact, with public investment and credit to the private sector showing insignificant impacts on private investment. The short run results also revealed that previous values of private investment influenced current investment but positively and negatively as well. Interest rate was found to exert negative impact for current and two year values whilst lag one showed positive impact. Other short run determinants of private investment were exchange rate, inflation, GDP, FDI, public investment, and credit to the private sector. The trend analysis also showed that both private investment and interest rate in Ghana have been unstable over the study period. The results suggested that interest rate must be able to encourage higher private investment. This can be done by increasing the real interest rate on private savings or household savings so that larger amount of income would be saved to accumulate more capital and hence private investment. By this, the higher real interest rate would increase private savings which would also increase capital accumulation and hence private investment.
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirements for the Award of Master of Science Degree in Economics,