Interest Rate and its Threshold Effect on Private Investment: Evidence from Ghana

Abstract

This paper investigates the effect of interest rate on private investment and determine the threshold level beyond which interest rate becomes detrimental to private investment in Ghana. The paper employed annual time series data from 1986-2016. To investigate the effect of interest rate on private investment, the paper employed the autoregressive distributed lag (ARDL) model, while the quadratic function and conditional least square procedures were employed to estimate the interest rate threshold. Results from the ARDL model revealed positive long and short run effect of interest rate on private investment, thus confirming the McKinnon-Shaw hypothesis in Ghana. However, results from the quadratic function and conditional least square model found the threshold of 23.59% and 24% respectively, beyond which interest rate impacts negatively on private investment in Ghana. Thus, the paper recommends the deepening of the financial sector reforms, improving competition in the financial sector as well as maintaining macroeconomic stability.