Modeling Interest Rate on Economic growth of Kenya between 1970 and 2018
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Date
2020Author
Nyambane, Maureen, N
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The high-interest rate has been a problem in Sub-Saharan Africa, specifically
Kenya, for a long time. The high-interest rates have prevented the growth of
companies since they shun away from borrowing capital to grow their business.
Most governments have used interest rate capping as a ceiling tool to regulate and
control the excessive interest rate by financial institutions. During interest rate
capping periods, the Kenyan government controls the official interest rate for banks
operating within their borders, hence reducing banks’ appetite to deposit, which
may reduce money in circulation, thus reducing demand and supply. Developing
countries, like Kenya, tend to have a negative real interest rate resulting from
administrative controls on nominal interest rates and burdensome regulations of
their financial markets. Existing studies that have indirectly linked interest rates
and economic growth are from Latin America and Asia. Furthermore, existing
studies have adopted inappropriate mathematical tools to relate to interest rates
and economic growth.
The study sort to the model interest rate on the economic growth of Kenya
between 1970 and 2018. The study specifically 1) Model interest rate capping
and economic growth of Kenya. 2) Model mathematical relationship between the
lending interest rate and economic growth of Kenya. 3) Estimate the mathematical
relationship between the deposit interest rate and economic growth of Kenya and 4)
Approximate mathematical relationship between the real interest rate and economic
growth of Kenya.
Data analysis based on SPSS, Matlab, Excel and R for secondary data central
bank of Kenya website indicated that only the real interest rate has a positive
correlation with economic growth. Regression analysis also suggests that only the
real interest rate positively affects economic growth. Descriptive statistics indicated
that the capping interest rate has the highest standard error mean (1:1536), and
economic growth had the least standard error mean value (0:5936). The models
formulated also show capping interest rates and lending interest rates have negative
relationships with economic growth. The relationship between the deposit interest
rate and economic growth is based on regression equation and deposit interest rate
is estimated based on an optimization problem. The optimization problem solution
indicates that the optimal deposit interest rate is 0:06039. The real interest rate
model formulated also shows that a positive relationship with economic growth.
The study concludes that the interest rate is significant in economic growth. The
study suggests a future segmented short- and long-term effects of interest rate
indicators on economic growth.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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