MST-Department of Economic Theory

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Browsing MST-Department of Economic Theory by Subject "Effect of Interest Rates"

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    Effect of Interest Rates on Economic Growth in Kenya
    (KENYATTA UNIVERSITY, 2023) Macharia, Wilson Mwangi; Muthoga Samuel
    Economic growth for any economy is a primemacroeconomic variable since it is one of the determiners of people’s living standards. Positive economic growth reduces poverty, unemployment, improves public services and reduces the debt to GDP ratio. Interest rates have either a direct or indirect effect on a country’s economy as itaffects both investors, borrowers as well as savings and investments which influences the economy. However, Kenya’s ambition of achieving a 10% rate of economic growth in vision 2030 and becominga middle-income nation has not been a walk in the park. The government institutions are still struggling to achievetheir goals and agendas within their long-term development plansencompassed in the “Vision 2030.” The country has continued to register low economicgrowth. The studysought to investigate interest rates effects on Kenyan economic growth. Specifically, the study assessed lending interest rates and central bank rates effects on economic growth. The study reviewedrate of interest classical theory, Solow Growth Model, Keynes Liquidity Preference Theory, loanable funds theory and theory of pricing.Research Design embraced in the study waslongitudinal. This study wasanchored on Solow’s Growth model. Data on central bank rates, lending interest rates and growth in the economywere obtained fromCentral Bank of Kenya ranging from 2001 to 2020. Appropriateness of datawas assessed through diagnostic tests which included multicollinearity, heteroscedasticity and autocorrelation in regard to regression analysis assumptions. Descriptive statistics such as central tendency measures, correlation, inferential statistics and regression analysis were involved in the analysis of Data.The study wouldbenefit the Kenyan government, Central Bank of Kenya, commercial banks,Scholars and future researchers. The diagnostic tests established that data did not suffer from heteroscedasticity, autocorrelation or multicollinearity. Findings revealed that commercial banks’ lending interest rates during study period was higher than the rates by central bank. The results showed that lending rate of interest depicteda positive but statistically insignificant link to GDP while central bank rates results depicted a positive and statistically significantlink to GDP.The combined model results however showed that the model is significant hence interest rates significantly affect economic growth. Following study’s findings, a conclusion drawn was that effects of interest rates on growth in the economy was significant. The study concludes that commercial banks’ lending interest rates depicts positive but have insignificant economic growth effects. In addition, the study concludes that central banks rates have a positive effects and affects economic growth significantly.