Interest rate liberalization, financial development and economic growth in Sub-Saharan African economies

Abstract

This study considers a structural interaction of the interest rate liberalisation-growth nexus; through the inclusion of financial development variables, for sub-Saharan African economies spanning the periods 1980-2012. Coupled with the institutional theory of growth, this study relies on the McKinnon-Shaw framework and, given its merits over conventional tests, a battery of panel unit-root tests was used to purify our data off spurious regression estimates. Later, both panel cointegration and panel error correction models were employed for empirical investigations. From the results obtained, it was evident that other factors such as the openness on trade and price stability are much more significant for interest rate liberalisation and economic growth in sub-Saharan African countries. More so, the extent as well as degree of financial development relatively assisted in reducing interest rate; further facilitates investment and then engendered growth. Theoretically, this study aligns with the McKinnon-Shaw hypothesis of interest rate-growth nexus. Interestingly, the results show that public institutions have been found significantly detrimental at driving the growth process of the sub-Saharan African economies. From the foregoing, the level of financial development, price stability and institutional arrangement should be properly attended to for effective and far-reaching policy suggestions in sub-Saharan African economies.

Keywords: Interest rate, Financial development, Economic Growth, Liberalisation, Panel