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Journal of Empirical Studies

June 2021, Volume 8, 1, pp 13-24

Interest Rate–Economic Growth Nexus Under Currency Board Operations

Martinianus Tshimologo Tibinyane

,

Teresia Kaulihowa

Martinianus Tshimologo Tibinyane 1

Teresia Kaulihowa 2

  1. Stellenbosch University: Faculty of Economic and Management Sciences South Africa. 1

  2. Namibia University of Science and Technology, Department of Accounting, Economics and Finance Windhoek, Namibia. 2

Pages: 13-24

DOI: 10.18488/journal.66.2021.81.13.24

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Article History:

Received: 02 August, 2021
Revised: 06 September, 2021
Accepted: 22 September, 2021
Published: 07 October, 2021


Abstract:

This paper analyses the effect of the prime interest rate as a monetary policy instrument to stimulate economic growth in Namibia, a small open economy that is constrained by currency board operations. A Vector Autoregressive Model (VAR) was used for the period 1980–2019. The result shows that Namibia’s prime interest rate has no significant effect on economic growth. This finding remains robust and consistent when impulse response function and variance decomposition are employed. The impulse response function indicates a shock on the prime interest rate exhibits an inverse relationship. However, this effect is insignificant in both short and long-run scenarios. The variance decomposition indicates that the prime interest rate has a strongly exogenous impact, implying it has a weak influence on GDP growth. Policy implication indicates that small open economies under currency board operations need to identify different policy responses to circumvent external shocks and addresses their development needs.
Contribution/ Originality
This study contributes to existing literature by analysing the effect of the prime interest rate as a monetary policy instrument to stimulate economic growth in Namibia.

Keywords:

Interest rates, Repo rate, Currency board, Namibia, Bank of Namibia, Economic growth.

Reference:


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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

Both authors contributed equally to the conception and design of the study.

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