Macroeconomic determinants of interest rate spreads in Ghana

Abstract

PurposeThe purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013.Design/methodology/approachThe autoregressive distributed lag bounds test approach to cointegration and the error correction model were used for the estimation.FindingsThe results indicate that exchange rate volatility, fiscal deficit, economic growth, and public sector borrowing from commercial banks, increase interest rate spreads in Ghana in both the long and short run. Institutional quality reduces interest rate spreads in the long run while lending interest rate volatility and monetary policy rate reduce interest rate spreads in the short run.Research limitations/implicationsThe depreciation of the Ghana cedi must be controlled since its volatility increases spreads. There is a need for fiscal discipline since fiscal deficits increase interest rate spreads. Government must reduce its domestic borrowing because the associated crowding-out effect increases interest rate spreads. The central bank must improve its monitoring and regulation of the financial sector in order to reduce spreads.Originality/valueThe main novelty of the paper (compared to other studies on Ghana) lies on the one hand; analysing macroeconomic determinants of interest rate spreads and, on the other hand, controlling for the impact of institutional quality on interest rate spreads in Ghana.