Abstract
This study attempts to empirically investigate the impact of interest rate reforms on the efficiency of credit allocation in Tanzania, using the recently developed ARDL-Bounds test approach proposed by Pesaran et al. (2001). Contrary to the results obtained in some previous studies, the current study finds a distinct positive relationship between interest rate and investment efficiency in Tanzania. The coefficient of real interest rate in the investment efficiency function is found to be positive and statistically significant, as expected. The study, therefore, concludes that the financial system in Tanzania has had a significant and positive influence on the quality of investment during the study period. It also implies that the current financial liberalisation taking place in Tanzania has succeeded in transferring capital from projects with low returns to projects with high returns. However, this applies only in the short-run.
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