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The Dynamic Relationship between Real Interest Rate and Investment: An Empirical Analysis for Selected Pacific Island Countries

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  • Shabnam Sazma Bano

    (Lecturer in Economics, School of Economics and Finance, College of Business, Hospitality and Tourism, Fiji National University, Fiji Islands.)

Abstract

This study investigates the short run and long run relationship between real interest rate and investment for selected PICs using a PMG - Panel ARDL approach for the period 1980 to 2016. The study reveals a significant negative relationship between real interest rate and investment in long run while a positive relationship in short run across all PICs, except for Samoa. The PMG results further show that economic variables such as growth rate, communication, foreign investment, aid and real exchange rate are investment creating in the long run while savings rate is investment reducing. In the short run only foreign direct investment and economic growth is investment creating while all other variables are investment reducing. The speed of adjustment is also a good predictor and reflected that stability will be restored across all countries in the long run. The achieved results have important policy implication for the PICs.

Suggested Citation

  • Shabnam Sazma Bano, 2018. "The Dynamic Relationship between Real Interest Rate and Investment: An Empirical Analysis for Selected Pacific Island Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 8(5), pages 131-141.
    • Handle: RePEc:eco:journ1:2018-05-19
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    References listed on IDEAS

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    2. Godwin Olasehinde-Williams & Oktay Özkan, 2022. "Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 507-521, July.

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    More about this item

    Keywords

    Panel ARDL; investment; real interest rate; PICs;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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