Is Interest Rate an Effective Instrument for Controlling Inflation and Its Effect on Investment Activities in Developing Countries?

Nor Isma Liyana binti Hasran, Jumadil Saputra and Adnan ul Haque ()
Additional contact information
Nor Isma Liyana binti Hasran: Universiti Malaysia Terengganu
Jumadil Saputra: Universiti Malaysia Terengganu
Adnan ul Haque: Yorkville University

A chapter in Corporate Management Ecosystem in Emerging Economies, 2023, pp 367-401 from Springer

Abstract: Abstract Interest rates are often related to inflation, as extant literature on theory and policy indicates that interest rate is an instrument to control inflation. Rising price levels are also associated with weaker investor confidence. As in the IS–LM (investment–saving and liquidity preference–money supply) model, John Hicks explained that it is a two-dimensional macroeconomic tool that shows the relationship between interest rates and the assets market. However, there is a debate among researchers about whether interest rate (IR) is an effective instrument to control inflation (INFL) in developing countries. This debate is parallel to this research and aims to test the effectiveness of interest rates to control inflation in 20 selected developing countries. The research question is whether interest rate has a moderating or mediating effect to foreign direct investment (FDI). This study uses panel data from 20 developing countries (Bangladesh, Brunei, Chile, China, Colombia, India, Indonesia, Jordan, Laos, Malaysia, Maldives, Mongolia, Myanmar, Nigeria, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, and Vietnam) from 1991 until 2021. We analyse inflation (INFL), interest rate (IR), money supply (MS), exchange rate (EXC), and foreign direct investment (FDI) using panel data regression. The result indicates that the fixed-effect model is the best model. Further, money supply (MS) and exchange rate (EXC) have a significant positive relationship with foreign direct investment (FDI). Meanwhile, interest rate (IR) has no significant relationship with foreign direct investment (FDI). We also found that Nigeria coefficient of money supply (MS) and exchange rate (EXC) are higher and more efficient than in another 19 selected developing countries. In conclusion, the main variables that affect foreign direct investment were money supply (MS) and exchange rate (EXC) while the interest rate (IR) is just mediating effect to foreign direct investment (FDI).

Keywords: Effective investments; Interest rates; Inflation; Emerging economies (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-41578-4_20

Ordering information: This item can be ordered from
http://www.springer.com/9783031415784

DOI: 10.1007/978-3-031-41578-4_20

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().