IMPACT OF INTEREST RATES ON PRIVATE INVESTMENT IN TANZANIA

Michael O.A. Ndanshau and Haika V. Mgonja

MPRA Paper from University Library of Munich, Germany

Abstract: The main objective of this paper was to investigate the impact of the real lending rate on private investment in Tanzania, using annual time-series data for the period between 1967 and 2020. The two-step Engle-Granger cointegration test and an error correction model (ECM) were estimated to establish the long-run and short-run dynamics among private investment, the real interest rate, and other covariates relevant to Tanzania. The Engel-Granger procedure revealed private investment was cointegrated with the real lending rate and other covariates –real income per capita, bank credit, and economic openness. The OLS results revealed the long-run real interest rate elasticity with respect to private investment was negative, as expected, but was statistically insignificant. The ECM results revealed that the short-run interest rate elasticity of private investment was positive and statistically significant. The study also found that bank credit, inflation, and financial sector reforms were theoretically consistent determinants of private investment over the long run. Besides, the study found that the short-run effects of openness and financial sector reforms were statistically significant, but negative and positive, respectively. The basic results indicate the limited relevance of interest rate policy to the conduct of monetary policy aimed at fostering private investment in Tanzania. The results, however, emphasize the importance of price stability in promoting private investment and economic growth. The results also underscore the importance of a liberalized financial sector in the process of economic development and growth, at least in Tanzania and per the chosen sample period.

Keywords: Real interest rate; private investment; Cointegration test (search for similar items in EconPapers)
JEL-codes: E22 E5 O55 (search for similar items in EconPapers)
Date: 2025-07
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