Real interest rate and economic growth: A statistical exploration for transitory economies

The paper examines the mechanism through which the real interest rate establishes a negative impact on economic growth in transitory economies. We Used dynamic panel data technique based on the Generalized Method of Moments (n-step estimation) under ten equations SEM for the period of 1996–2015 of 38 countries having different transition levels. The results establish the multi-fold inverse relation of real interest rate with economic growth through local and foreign investments, human capital, trade openness, exchange rate, inflation, institutional strength, political instability, and corruption. The study finds that interest rate is exogenously determined in transitory economies where real interest rate through its multiple channels may not only detrimental but also restricts the economy to sustain its respective transitional level and to achieve higher growth rate. As a policy implication, this work suggests a low interest rate is highly required and beneficial for transitory/developing nations to sustain the transition and attain higher growth rate, rapidly.