Financial sector reforms and private investment in Malawi: an ARDL-bounds testing approach

Abstract

This study attempts to examine the impact of financial sector reforms (proxied by interest rate liberalisation) on private investment in Malawi, using the ARDL bounds testing approach. The study is motivated by the conflicting results that have been reported in the literature in recent years on the efficacy of interest rate liberalisation in developing countries. The study seeks to answer one critical question: does interest rate liberalisation spur private investment in Malawi? The empirical results of this study reveal that interest rates have a positive and significant impact on private investment in the short-run, but not in the long-run. The study, therefore, recommends that interest rate reforms should be intensified in Malawi in the short-run. However, in the long-run, the monetary authorities should keep an eye on the interest rates, in order to ensure that they remain within the acceptable threshold.