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Interest Rate Liberalization and Economic Growth in Zambia: A Dynamic Linkage
Authors:Nicholas M Odhiambo
Institution:1. Economics Department, University of South Africa (UNISA), PO Box 392, UNISA, 0003, Pretoria, South Africa;2. e‐mail: nmbaya99@yahoo.com;3. odhianm@unisa.ac.za. The author wishes to acknowledge with thanks the financial support from the Organisation for Social Science Research in Eastern and Southern Africa (OSSREA). Helpful comments from two anonymous referees of this journal on the earlier version of this paper are also gratefully acknowledged. The usual disclaimer applies.
Abstract:Abstract: This paper examines the dynamic impact of interest rate reforms on economic growth in Zambia—using two models in a stepwise fashion. In the first model, the efficacy of interest rate liberalization is examined by regressing the interest rate on the level of financial deepening. In the second model, the causal relationship between financial depth and economic growth is examined by incorporating savings as an intermittent variable in the bivariate setting, thereby creating a simple trivariate model. Using the cointegration‐based error correction model, the study finds strong support for the positive impact of interest rate liberalization on financial deepening. In addition, the study finds that financial deepening, which results from interest rate liberalization, Granger causes economic growth. The results apply irrespective of whether the causality is estimated in the short run or in the long run. Other results show that: (1) lagged financial depth leads to further financial deepening; (2) savings and economic growth Granger cause each other; and (3) financial development Granger causes savings in the long run.
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