Abstract
This study sought to determine the relationship between short term interest rate, long term interest rate, and private domestic investment in Kenya using time series quarterly data spanning 1997 to 2018. Vector autoregressive model was used to estimate the relationship. The findings show that the central bank rate and lending rate significantly impact private domestic investment. The results emphasize the role of interest rate policy and monetary policy in driving domestic private investment in Kenya. The findings of this study will be of benefit to policy makers through provision of data-based evidence that will be used as a guide while making appropriate policies to encourage growth of private domestic investment in the country leading to economic growth.
Highlights
The economic recovery and prosperity plan for Kenya is outlined in Vision 2030
The results show that the Central bank rate (CBK_rate), Domestic private
The coefficients of a simple VAR model can be obtained using the OLS technique. 3.2 Vector Auto-regression (VAR) Vector Auto-regression (VAR) model is a theory-free method used for the estimation of economic relationships (Sims, 1980)
Summary
The economic recovery and prosperity plan for Kenya is outlined in Vision 2030. Among other competing objectives, the vision seeks to transform Kenya into an industrialized, middle-income country providing a high quality of life to all its citizens in a clean and secure environment. A review of Figure 2 shows a persistent decline in private investment from 2016-2018 signaling a further deviate from the vision 2030 expected growth rates. In the third quarters of 2002, the looser monetary policy stance came into force, with nominal short-term interest rates beginning to fall below 10 percent and continuing to fall to less than 1 percent in 2004 Corresponding to these developments are accelerated growth rates for the money supply in the economy. This study sought to determine the relationship between private domestic investment and both long term and short term interest rates using quarterly time series data spanning 1997 to 2018. This study seeks, to understand the relationship between the short term, long-term interest rates, and domestic private investment in Kenya using econometric model. The study relied on PP test given its superiority to other tests
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