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The relationship between interest rates and Economic growth in Namibia, 1991 – 2009 By Johannes Hasekiel Ndaikemona The paper investigates the relationship between interest rates and economic growth in Namibia, using time series analysis and annual data from 1991 - 2009. The unit tests, augmented dickey-fuller (ADF) and granger causality test model were used to capture both the long-run and short-run dynamics of the variables in the model. The empirical results indicate that real lending rates, repo rate and prime lending rate have significant effect on economic growth. There also exists a unique longrun relationship between economic growth and its determinants, including interest rate. The results imply that the behavior of interest rate is important for economic growth in view of the relationships between interest rates and growth. Thus, the formulation and implementation of financial policies that enhance investment-friendly rate of interest is necessary for promoting economic growth in Namibia. Key words: Interest rates, economic growth, monetary policy.

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Table of Contents

ABBREVIATIONS & ACRONYMS ........................................................................................................... 4 CHAPTER ONE ........................................................................................................................................... 5 1.1 Introduction ............................................................................................................................................. 5 1.2 Research Background ............................................................................................................................. 6 1.3 Problem Statement .................................................................................................................................. 7 1.4 Research Objectives ................................................................................................................................ 8 1.5 Research Questions ................................................................................................................................. 8 1.6 Research Hypothesis ............................................................................................................................... 8 1.7 Delimitations and Scope of study ....................................................................................................... 8 1.8 Outline of the study ................................................................................................................................. 9 1.9 Significance of the study ....................................................................................................................... 10 1.10. Definition of technical terms.............................................................................................................. 11 CHAPTER TWO ........................................................................................................................................ 12 2.1 Review of Related Literatures............................................................................................................... 12 CHAPTER THREE .................................................................................................................................... 16 METHODOLOGY OF THE RESEARCH ................................................................................................. 16 3.1 Methods of the Research ....................................................................................................................... 16 3.2 Unit Roots ............................................................................................................................................. 16 3.3 Granger Causality ................................................................................................................................. 17 3.4 Model Building and Specification ........................................................................................................ 18 3.7 Sources of data ...................................................................................................................................... 20 CHAPTER FOUR....................................................................................................................................... 21 2|Page


ANALYSIS OF REGRESSION RESULTS ............................................................................................... 21 4.1.

Introduction ................................................................................................................................. 21

4.2.1 Definitions of variables. ..................................................................................................................... 22 4.2.2 Stationary test..................................................................................................................................... 22 4.2.3 Results table ....................................................................................................................................... 24 4.3 Granger Causality test ........................................................................................................................... 25 CHAPTER FIVE ........................................................................................................................................ 27 FINDINGS, CONCLUSION AND RECOMMENDATIONS ................................................................... 27 5.1 Findings............................................................................................................................................. 27 5.2 Conclusion and Research implication ................................................................................................... 28 References ................................................................................................................................................... 29 Appendix A ................................................................................................................................................. 31 Quarterly data: ............................................................................................................................................ 31

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ABBREVIATIONS & ACRONYMS

MoF

-

Ministry of Finance

NEPRU

-

Namibia Economic Policy Research Unit

GDP

-

Gross Domestic Product

H1

-

Alternative Hypothesis

Ho

-

Null Hypothesis

Imp

-

Imports

IR

-

Inflation Rate

NPC

-

National Planning Commission

OLS

-

Ordinary Least Squares

BoN

-

Bank of Namibia

SV

-

Saving

INT RATE

-

Interest rate

t

-

Time factor

ADF

-

Augmented Dickey-Fuller

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CHAPTER ONE 1.1 Introduction To get a bright future for this paper, let me first define the concept. According to Investopedia, Interest Rate is charged by lenders as compensation for the loss of the asset's use. In the case of lending money, the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves. This study much attention will be devoted to study the casual relationship between interest rate and economic growth of Namibia. In this context my focus will mainly be on the monetary interest rates which are the repo rate, prime lending rate and deposit rate. In my research econometrics methods will be incorporated to run regressions to get well established results. The data will be from the 2000 to 2010 for relevance purpose. Since the data are primary occupant there will be no use to have questionnaires, this lighten that this research paper is more quantitative.

In general there are a lot of determinants of interest rate which are the systemic risk, regulatory law and the inflation risk; the paper looked at the relationship between interest rates and GDP of the Namibian Economy. To keep you going let me present you to the main content of this paper doing from chapter to chapter whereby there are three chapters. Chapter one will have the introductions, chapter two will contain the reviews of relevant literature and theatrical Framework, chapter three holds methodology: research Design/Frame and last one chapter three presents the methodology of the research.

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1.2 Research Background

Interest rate fluctuations can have good and bad effect on the economy, this brought up a question to what extends does interest rate effect economic growth of a country, and what variable cause the other one. The ultimate objective of monetary policy in any economy is price stability, in other words, maintaining a low and stable rate of inflation. Although monetary policy cannot directly influence economic growth it can provide a conducive environment that encourages growth, i.e. low and stable prices. When prices are stable, people can effectively plan to invest, save and consume. High inflation discourages investment in products that help the economy to grow. When there are indications of excess demand and rising inflationary pressures, the central bank can increase the bank rate to reduce domestic demand. This is called restrictive monetary policy. On the other hand, through expansionary monetary policy, Central Bank can reduce the Bank rate to increase money supply in order to stimulate domestic demand. This will contribute to increased economic growth.

During the second half of 2010, most advanced and many emerging economies maintained their accommodative monetary policy stances in the face of sluggish economic recovery and uncertain outlook. However, some countries raised their rates during the period to restrain inflationary pressures this include the US federal reserve bank (fed) in US and china’s central bank. For the purpose of keeping their monetary economy healthy some of the central banks of the emerging economies; Bank of England (BOE) and the bank of Japan (BOJ) decide to keep their official respective policy rates constant since the second half of 2009 ( BoN Financial Stability Report, March 2011; 11) According to the BON Financial Stability Report March (2011) the general trend in the Namibia interest rates was descending in the second half of 2010. The Bank of Namibia (BON) adjusted its repo rate in October 2010 from 7.0 percent 6.75 percent and again in December 2010 to 6.0 percent. The main aim; of cutting in the policy was further support domestic demand and strengthen economic growth of Namibia. The sustained fall in the domestic inflation rate that 6|Page


started since December 2009, coupled with the need to support economic recovery, permitted the lower of the policy rate during the period. In response to the policy rate cuts by the BON, banking institutions adjusted their rates. The prime lending rate fell by 1.5 percent points from 11.25 percent in June 2010 to 9.75 percent in December 2010. The average nominal lending rate and the average nominal deposit rate also declined. The former fell by 0.77 percentage points from 9.78 percent at the end of the first half of 2010 to 9.01 percent at the end of the second half of 2010. During the same period, the latter rate declined from 5.06 percent to 4.41 percent. Consequent to these developments the spread between the lending and deposit rates narrowed to 4.6 percentage points in November 2010. Economically when we talk of the Namibian monetary economy we also need also need to talk about South African, inclusively as followed; The South African Reserve Bank (SARB) reduced its repo rate twice by basis points between September and November 2010. The combined cuts reduced the repo rate from 6.5 percent to 5.5 percent. The repo rate cuts were partly at boosting economic growth after the economy fell into recession in 2009. I brought up his statistic because the Namibian monetary economies depend on the South African monetary due to the Common Monetary Area (CMA) Arrangements.

1.3 Problem Statement

Interest rates are part of the economic mechanism. When interest rates increase, borrowing becomes more expensive, dampening consumer demand for mortgages and other loan products and negatively affecting individuals, business real estate prices. Rising interest rates can also lead to increased default rates, as holders of adjustable rate debt find themselves faced with higher payments. When interest rates increases; investments, net exports, consumption, saving and inflation tend to go down, money supply will also be low, while demand for money becomes high. The case is the opposite when it comes to decreasing interest rates you may find that investment, net exports, consumption, saving and inflation go up, while money supply increase and money demand become low. Vendors of mortgage backed securities, which consist of bundled 7|Page


mortgages, will see their ability to monetize the securities lessens as a result of the deterioration of the quality of the underlying asset. Macroeconomics policies have been set into place to conquer the phenomenon. This is basically the monetary policies. On this account the Bank of Namibia (BoN), the bank has been tackling the issue by reducing the repo rate/bank rate to keep the interest rates charged by commercial banks on individuals on check. If the central bank did not accouter any problem that results on the fluctuation of interests (in this case prime lending rate, deposits rate) this means low GDP in the economy and the main objectives for the monetary policy will not be attained. This change has an impact on the economic growth of Namibia, therefore this need to be analyzed to find out what needs to be done to have an affective monetary policy. 1.4 Research Objectives The objective of this study is to determine the causal relationship between interest rates and economic growth in Namibia, and provided that the relationship is found the study also seeks to establish the nature and extent of that relationship. 1.5 Research Questions 1.5.1 Is there a long-run relationship between Interest rates and economic growth in Namibia? 1.5.2

What is the direction of causality between Interest rates and economic growth in

Namibia? 1.6 Research Hypothesis The following null hypothesis will be evaluated in this study: 

Ho: Interest Rates do not cause economic growth.



HI: Economic growth does not cause Interest rate to increase.

1.7 Delimitations and Scope of study 

Scope

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The study will considers more on the impact of interest rate (bank rate, prime lending rate and deposit rate) on economic growth in Namibia. The study was only made focus on the impact of interest rate (Bank Rate, Prime lending rates and Deposit rate) in Namibia; because of the limited scope of this study therefore other countries were not included. The reason for choosing three proxies Interest rate ( Repo rate, Prime lending rates and Deposit rates) and three proxies for GDP (Investment( Gross Fixed Capital formation, GDP at constant price and GDP per capita) that were used in the study was that all the data was readily available than other alternative policies. Six variables was used in this study ,despite there being numerous variables used to determine economic growth, but basically I will only look at interest rates which I have mentioned above. Other variables I will leave them for other research for the relevance of their studies. This means do not find it difficult when some of the variables are not well justified. The periods under study will be between 1991 and 2009 and my data will be done quarterly to have a good large sample to deal with.  Limitations of the study Time is so short that I cannot gather the necessary required information. The lack of relevant literature in the libraries, because books have been borrowed out and inaccessibility to computers facilities because their out of order the most of the time were constrain to the study. Lack of information on the economic variables that has an impact on the interest rate problems is one of the limitations. In additions it seems that this type of study was never conducted in Namibia.

1.8 Outline of the study The research paper consists of 5 chapters. The first chapter will focus on the introduction and background of the research topic under investigation. In addition to this, the research problem, objective, hypothesis and scope, are discussed and will be explained in this chapter. Chapter 2 discusses the literature review and theoretical framework of the research project. In chapter 3, the methodology of the research will be discussed.

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1.9 Significance of the study The importance of this study is to provide statistical evidence of the impact of interest rate on economic growth in Namibia. In addition is to find out which variable cause the other one when we run regression using Granger Causality. The study will cover the period of 1991-2009. It will also includes explanatory variables such as investment, inflation rate, saving, consumption and government spending. The study will help in finding the effect of interest rate on various economic variables in Namibia. These variables are typical of those applied in other empirical analysis of interest rate in the Sub Saharan African countries.

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1.10. Definition of technical terms Key operational terms and concepts used in the research project were defined as follows: 

Analysis: It is the examination and evaluation of the relevant information to select the best course of action from among various alternatives.

Economic development: It is refers to a sustainable increase in living standards of people.

Economic growth: It is the percentage annual change in the national income of a country.

Econometrics: It is a technique of economic analysis that expresses economic theory in terms of mathematical relationships and then tests it empirically through statistical research.

Gross Domestic Product (GDP): It is the value of all domestically produced final goods and services provided within the borders during a particular period.

Imports: are goods, services and capital assets that are bought from foreign countries.

Interest Rates: it is often expressed as a percentage paid on the nominal amount.

Net Export: It is a difference between country's imports and its exports during a specific period.

Multiple Regressions Analysis: It is a statistical tool used to study the relationship between a dependent (explained) variable and one or more independent (explanatory) variables.

Bank rate: the rate that the Central banks charges commercial banks when they borrow from it.

Prime lending rate: the rate commercial banks charge their customers.

Deposit rates: The interest rate paid by financial institutions to deposit account holders.

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CHAPTER TWO LITERATURE REVIEW AND THEORETICAL FRAMEWORK In this chapter, related literature will reviewed and the theoretical framework will be briefly analyzed. 2.1 Review of Related Literatures 

Theoretical literature

In accordance to Loanable funds theory of interest rate, developed by Swedish economist Knut W. (1851-1926), assumes that interest rates are determined by supply of loanable funds and demand for credit. In loanable funds theory the demand of loanable funds originates from domestic business, consumers, governments and foreign borrowers. While the supply is generated by domestic savings, dispersion of money balances money creation in the banking system and foreign lending. With these factors determining long-term interest rates, short term interest rates are decided by financial and monetary conditions in the economy. The many factors considered in loanable funds theory mean that equilibrium will be reached only when each of the factors is in equilibrium. Secondly we can talk of the rational expectations theory of interest rates that was developed by John F. Muth (1960) which is based on the idea that people formulate expectations based on all the information that is available in the market. Rational expectation theory holds that the best estimation for future interest rates is the current spot rate and that changes in interest rates are primarily due to unexpected information or changes in economic factors. The rational expectations theory can be incorporated with the loanable funds theory in order to better consider the available information with the economy. The limiting factors of rational expectation theory are mostly related to the difficulty in gathering information and understanding how the public uses its information to form its expectations.

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According to Adam Smith's The Wealth of Nations in (1776), the classical theory of interest rates applies the classical theory of economics to determining interest rates. Classical theory of interest rates compares the supply of savings with the demand for borrowing. Using supply and demand curves the equilibrium rate is calculated by determining the curves intersection point. Thus if savings are greater than investments the interest rate drops until they reach equilibrium and vice versa, if savings are less than investment the interest rate increases until the reward for savings encourages increased savings rates causing the market to again reach equilibrium. However the classical theory of interest rates fails to account for factors besides supply and demand that may affect interest rates such as the creation of funds, the importance of income and wealth and changes in the primary borrowers in an economy.

According to Keynes, in his book, The General Theory of Employment, Interest and Money (1936) he goes at some length into impacts on interest rates of changes in the money supply, the resulting impacts on savings and investment, and the impacts of the identified complicating factors. He provides suitable equations - wisely again warning about their inherent limitations.

All of the described theories have shortcomings in some aspect. These limitations are based on the theories’ various assumptions which are necessary to understand the diverse aspects of economic influence and change. The most inclusive of these theories is the loanable funds theory and as such it is the choice of financial practitioners. The loanable funds theory includes many of the various factors that influence our markets. Because of the variety of influences included in the theory, any failure can be attributed to imbalances in the equilibrium of savings and investment, money supply and demand, the supply of loanable funds, or net foreign demand and exports.



Empirical literature 13 | P a g e


Estrella and Hardouvelis (1991). Examining data over the period 1955 to 1988, they document that the spread between the yield on the ten year Treasury bond and the three-month Treasury bill is a useful predictor of both cumulative economic growth up to four years in the future and marginal economic growth rates up to seven quarters in the future. They also find that the spread contains information for future economic growth not already embodied in the current level of real interest rates, in current economic growth, in the current growth rate of the index of leading economic indicators, or in the inflation rate.

According to Paul Krugman and Roben Wells in their book Economics, (2009) stated that a rise in interest rate reduces investment spending because it makes the cost of borrowing higher. It reduces consumers spending because households save more of their disposable income. So a rise in the aggregate prices depresses investment spending, I, and consumer spending, C, through its effect on the purchasing power of money holding. They called such an effect; as an interest rate effect of a change in the price level. This leads to downward-sloping aggregate demand curve. They explain this phenomenon by using the loanable fund theory. This theory simplify the model by assuming that there is just one financial market that brings together those who want to lend money (savers) and those who wants to borrow money ( firms with investment spending projects). This hypothetical market is known as the loanable funds market. The price is called interest rate. Since there is a lot of interest rate they also assumed that there is only one type of loan for simplicity.

This was some of the empirical studies that were made, in regards to my reaserch that I have conducted, it shows that there were not enough of the articles, journals and study that was conducted specific to this topic. For an economy to become a developed economy there should economic growth in the economy, this is whereby there is an increase in the gross domestic products with the good increment on the living standard of the individuals in the countries. This happens when in the country there is health fiscal and monetary policy. Since in this paper we are looking at the impact of interest rate 14 | P a g e


on the Namibian economic growth, Economic growth occurs mainly because of an increase in the capital supply, as determined by savings and investment decision; a growth in population to supply labor and enlarged markets; and an increase in technical knowledge and improvements in production. In this study, only seven independent variables which influence the dependent variable were used inflation rate, investment, consumption net export, interest rate, and government spending to analyze the impact of interest rate on Namibia’s economic growth. To make it easier and understandable, I am not going to discuss all of the variables in more details but mostly focusing on the variable under study.

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CHAPTER THREE METHODOLOGY OF THE RESEARCH In this chapter, more emphasis will be laid more on the procedures and methodology of this study. 3.1 Methods of the Research The study uses econometric techniques to determine the causal relationships between the variables of Interest rates and economic growth in Namibia for the period 1991: I - 2009: IV. Since the study uses time series data that is subject to non-stationary, we employ unit root tests to test for stationary of the different variables used. The study also employs a co integration test on the different variables used to establish a long run and short run relationships. The last test is the Granger causality test to determine the direction of the relationship between variables used. The theoretical basis follows the endogenous growth.

The study relied more on secondary data gathered. The nature of the study is quantitative; its findings might not be conclusive to leave room for future study. The Eview3.1 and PC-Give package is used to estimate the coefficients of the specified model. The evaluation is also done using economic and statistic criteria. The statistical evaluation will look at the coefficients and other statistics to determine significance. In this study, the co integration and vector error correction model is used to examine the direction of causality between Interest rates and economic growth. This approach has been used in finance - growth causality studies, among others (Eita & Jordaan, 2007; Odhiambo, 2007). The Granger causality test method is preferred in this study to other alternative techniques because of its favorable response to both large and small samples. The conventional Granger causality test involves the testing of the null hypothesis that change interest rate ∆R does not cause economic growth (GDP) and vice versa by simply running the following regressions

3.2 Unit Roots

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To distinguish data have stationary or not that have ACF or PACF figure diagnosis, DF, ADF, and PP methods. It is too arbitrary to use figure diagnosis to judge variable’s stationary. The study wants to use Augmented Dickey and Fuller test (ADF) that it is purpose to eliminate error term correlations. The model has three styles that show below. p

A. no intercept and no time trend items: yt   yt 1   t yt 1   t

(1)

t 1 p

B. intercept and no time trend item: yt     yt 1   t yt 1   t

(2)

t 1 p

C. intercept and time trend item: yt     t   yt 1   t yt 1   t

(3)

t 1

The study uses unit root process allowing for intercept and time trend to determine whether there is a unit root in the data series. 3.3 Granger Causality Most of economic model often assume different hypotheses to discuss variables’ relationship. However they could not make sure variables’ cause and effect relationship. Granger (1969) first person brought up to define lead and lag relations based on role of predictability. He uses twin factors of VAR to find variables’ causal relationship. It assumes two series X t and Yt that define those messages set. k

k

i 1

i 1

k

k

i 1

i 1

X t   0  1i X t 1   2iYt 1  1t Yt  0   1i X t 1    2iYt 1   2t

(4)

(5)

To test four coefficients find out variables’ relationship. a.  2i  0 and 1i  0 : It means Y lead X or X lag Y. b. 1i  0 and 2i  0 : It means X lead Y or Y lag X. c.  2i  0 and 1i  0 : It means both of variables are independent. 17 | P a g e


d.  2i  0 and 1i  0 : It means both of variables are interactive each other and have feedback relationship. 3.4 Model Building and Specification

(6)

This above models will help us to find the causality between Gross Domestic Products and Interests rate. To make easy I will be using only one type of interest rate which is Repo rate. To test this relationship will require us to use Granger Causality test, which believed that for event B to occur event a must first occur.

3.5 Granger Causality Model

The testing models will be specified in this way:

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(7)

(8) GDP represent real economic activities, R is the interest rate and the t is the time factor. This model was just to give an introductory to the formularizing tin general on how the granger causality has to be, above all the researcher didn’t indicated that all the other proxies of interest rates and GDP but this model was just brought into the paper to open the theoretical part of econometrics on how one can build the granger causality model. 3.6 Augmented Dickey-Fuller (ADF) test The augmented Dickey –Fuller (ADF) test root for

large and more complicated large set of

time series models. The augmented dickey-fuller statistic, use in tests, is a negative number. The rejections comes in by looking at the negativity of the number, the more negative it is the stronger the rejection of the hypothesis at some area of confidant. Testing procedures: The testing procedures of Augmented Dickey-fuller are the same Dickey Fuller test but some models are applied.

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3.7 Sources of data The sources of data used in the study are as follows: National Planning Commission (NPC), Bank of Namibia, Ministry of Finance (MoF) and local Banks and Namibia Economic Policy Research Unit (NEPRU). The journals, newspapers, internet and previous researches will make use of data collection in the study as secondary data.

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CHAPTER FOUR ANALYSIS OF REGRESSION RESULTS 4.1.

Introduction

In the previous chapter, the research methods were discussed and the models were specified. In this chapter, the regression results were estimated, presented and discussed. The time series analysis observes data based on different time period. The method analyzes variable’s output and dynamic relationship, then test economic model and predict variable. It hopes to find the relationship between current and past data relationship. However most of time series cases have random phenomena. It needs use some of method to adjust random time series, otherwise study can’t predict by random data. This study adopts unit root, Granger Causality, and multipleregression to test relations between interest rate and economic growth rate. The data is collected by Johannes Hasekiel Ndaikemona. The study period is from first quarter of 1999 to fourth quarter of 2009.

4.2 Presentations of the graphs in level To be able to have clear understanding the researcher first went through the process of keeping tracks on the trends within the covered period under study. The following is the presentations of the graphs in level; 22

14

11

12

20

10 18

8

Variable

8

9

Variable

Variable

10

6 4

16 14

2

7

12

0

10

-2

6 99

00

01

02

03

04

05 DR

06

07

08

09 Time

99

00

01

02

03

04

05

GDPC

06

07

08

09 Time

99

00

01

02

03

04

05

GFCF

06

07

08

09 Time

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Variable

Variable

24.6

24.5

24.4

20

16

18

14

16

12

14

24.3

12

24.2

10 99

00

01

02

03

04

05

06

07

08

LNGDPCP

09 Time

Variable

24.7

10

8

6 99

00

01

02

03

04

05

06

07

08

PLR

09

99

00

01

02

03

Time

04

05 RR

06

07

08

09

Time

From the graphs one can have a clue that there has been decreasing on the interest rates proxies’ and an increase on the GDP proxies. This means when interest increase than GDP will decrease this involves other economical factors like investment etc. 4.2.1 Definitions of variables.

GDPC

Gross Domestic Per Capita

GDCFC

Gross Fixed Capital Formation

LNGDPCP

Log of Gross Domestic Product at Constant Price

PLR

Prime lending Rate

RR

Repo rate

DR

Deposit Rates

4.2.2 Stationary test After the visual inspection of the trend in data, a formal test for stationary using the Augmented Dick Fuller or ADF test was used. The motivation for undertaking this test is to ensure that, the estimation results obtained from the data series are not spurious. The results of the ADF test are reported in Table 4.2.3 the test was conducted both in the levels as well as in first differences.

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Moreover, the critical value against which the null hypothesis of unit root was tested is also included.

2

8

10

6

1 5

4

-1

Variable

Variable

Variable

0 0

-2

2 0 -2

-5

-3

-4 -6

-10

-4 99

00

01

02

03

04

05

06

07

08

99

09

00

01

02

03

T ime

D(DR)

04

05

06

07

08

99

09

00

01

02

03

04

Time

D(GDPC)

05

06

07

2

3

0.10

1

2

0.08

0

08

09 Time

D(GFCF)

0.06 0.04

1

Variable

Variable

Variable

0.12

-1

0 -1

-2

-2

0.02

-3

0.00 -0.02 99

-3

-4 00

01

02

03

04

05

06

D(LNGDPCP)

07

08

09 Time

99

00

01

02

03

04

05

D(PLR)

06

07

08

09 Time

-4 99

00

01

02

03

04

05

D(RR)

06

07

08

09 T ime

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4.2.3 Results table Variable

Level

1st difference Order

of Variable

Integration GDPC

NNN

SSS

I(1)

D(GDPC)

GFCF

NNN

SSS

I(1)

D(GFCF)

LNGDPCP

NNN

SSS

I(1)

D(LNGDPCP)

PLR

NNN

SSS

I(1)

D(PLR)

RR

NNN

SSS

I(1)

D(RR)

DR

NNN

SSS

I(1) D(DR)

N=No stationary and S=stationary The results from the table state that all the variable where non stationary when tested at levels. The test was done all the way to be differenced at 1st difference where the entire variable becomes stationary in the 1st order of integration. GDPCP has to log to be change to percentage, therefore it’s indicated LNGDPCP.

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4.3 Granger Causality test

Pairwise Granger Causality Tests Date: 10/04/11 Time: 09:01 Sample: 1999:1 2009:4 Lags: 2

Null Hypothesis:

Obs

F-Statistic

Probability

D (GDPC) does not Granger Cause D (DR)

41

0.00216

0.99784

0.00136

0.99864

0.01061

0.98945

0.00451

0.99550

0.15475

0.85720

0.03815

0.96261

0.00284

0.99716

0.00653

0.99350

0.00204

0.99797

0.00288

0.99712

0.00815

0.99189

0.02642

0.97395

0.00517

0.99484

0.00933

0.99072

D (DR) does not Granger Cause D (GDPC)

D (GFCF) does not Granger Cause D (DR)

41

D (DR) does not Granger Cause D (GFCF)

D (LNGDPCP) does not Granger Cause D (DR)

41

D (DR) does not Granger Cause D (LNGDPCP)

D (PLR) does not Granger Cause D (GDPC)

41

D (GDPC) does not Granger Cause D (PLR)

D (RR) does not Granger Cause D (GDPC)

41

D (GDPC) does not Granger Cause D (RR)

D (PLR) does not Granger Cause D (GFCF)

41

D (GFCF) does not Granger Cause D (PLR)

D (RR) does not Granger Cause D (GFCF) D (GFCF) does not Granger Cause D (RR)

41

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D (PLR) does not Granger Cause D (LNGDPCP)

41

D (LNGDPCP) does not Granger Cause D (PLR)

D (RR) does not Granger Cause D (LNGDPCP) D (LNGDPCP) does not Granger Cause D (RR)

41

0.06828

0.93412

0.29407

0.74699

0.05782

0.94391

0.22972

0.79591

4.4 Results from granger causality tests The result from the above show that the causality among all variables tested is bi-directional, and this illustrates that an economics growth does cause an change in the interest rate. We can reject the null hypothesis because the probability is high than 10%, in addition this shows that a change in any interest rate proxy then it will cause a multiple effect on other interest rate proxies.

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CHAPTER FIVE FINDINGS, CONCLUSION AND RECOMMENDATIONS

In the previous chapter, regression results for each equation were analysed. The logarithmic transformations were also analysed and discussed. In this chapter, the findings, conclusion, and recommendations are presented and discussed.

5.1 Findings

The outcomes of the study through regression methods for the impact of interest rate on economic growth in Namibia were observed and present below. Firstly, the researcher observed that interest rate played an important role in economic growth improvement of the country. The researcher finds that the country is doing well in economic growth improvement. The Namibian economic growth were performing well during 1999 to 2009, the alternative hypothesis was therefore accepted. And the researcher concludes that there was statistical significance difference between interest rate and economic growth in Namibia.

Secondly, in this case, it was concluded after analysing all the six variables used to determine insignificance/significance difference between interest and economic growth on Namibian economy. The estimated results showed that all the regression proxies for interest rate were significant in determining economic growth of Namibia. This was the case for the granger causality model. On the other hand, both the variable that where incorporate in the study was vital for explaining economic growth of the country. These variables included prime lending rate, repo rate and deposit rate.

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Finally, each of the variables was tested against economic growth using granger causality in application of unit root tests. The study suggested that the most of the selected indicators were good indicators to be used for finding statistical insignificance/significance difference between trade and Economic growth in Namibia. The researcher concludes that there was encouraging economic growth in Namibia.

5.2 Conclusion and Research implication

The paper investigates the relationship between real interest rates and economic growth in Namibia. The results show that there exist a unique long-run relationship between interest rates and economic growth. Thus, interest rate is an important determinant of economic growth in Namibia. However, the deregulation of interest rates in Namibian may not optimally achieve its goals, if those other factors which negatively effects investment in the country, as suggested by Guseh and Oritsejafor(2007) are not tackled. This implies that the link between interest rate, investment and economic growth is not automatic. Thus, the relationship between investments and growth in Namibia may not allow for optimal benefits from interest rate reforms in the country. The important condition for promoting economic growth, therefore, is for the government to formulate and implement financial policies that enhance investment-friendly rate of interest and take into consideration those other factors which negatively affect investment in the country.

Finally, more research on economic performance of Namibia needs to be conducted to get a clear picture of their economic growth performances instead of grouped research which was less likely to provide the true reflection of the performances of Namibia’s economic growth. There was still a need for more commitments by the policy makers to ensure that the set targets for economic growth improvement are being met.

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References African Institute for Applied Economics (AIAE) (2005). ‘Sustainability of Economic Growth in Nigeria: The Role of the Renewable Natural Resource’, Summary of Research Findings and Policy Implications,Enugu, Nigeria Aderton and Alain. (2008) Economics AQA (5th Edition), Graphicas astella, Navarra,spain Anoruo E., and Ahmad, Y., 2001, Causal Relationship between Domestic Savings and Economic Growth: Evidence from Seven African Countries, African Development Bank, Blackwell Publishers, Oxford. Brooks, C. (2002). Introductory Econometrics for Finance. Cambridge University Press. Bank of Namibia, Annual report (2010) Bank of Namibia, Financial Stability Report March (2011) Dickey DA, Fuller WA (1979). ‘Testing for Serial Correlation in Least Square Regression’ Biometrical. 58: 20-35. Dickey DA, Fuller WA (1981). ‘Likelihood Ratio Test for Auto RegressiveTime Series with a Unit Root’. Econometrical 49: 1057-1072.Fosu AK (2002). ‘Political Instability and Economic Growth.’ Am. J.Econ. Sociol. Vol. 61 Fisher, M.E., and Seater J.J. (1993). Long-Run Neutrality and Superneutrality in an ARIMAFramework. American Economic Review, 83: 402-15.

Gustav Cassel. (1927-8), Quarterly Journal of Economics, vol. 42 pp. 511-29. John M. Keynes. The General Theory of Employment, Interest and Money (1936) Phillips, P.C.B and P. Perron (1988), "Testing for a Unit Root in Time Series Regression", Biometrika, 75, 335–346 Paul K, Robin W and Kathryn G. (2007) Economics, (European edition), Worth Publisher, United State of America

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Paul K and Robin W. (2009) Economics (2nd Edition), Newyork, Worth publisher, United State of America http://books.google.com.na/books?id=OkBggoM8G1kC&pg=PA553&lpg=PA553&dq=interest+ rate+and+net+exports&source=bl&ots=QQhkWfhGW0&sig=D_9VkOKkxKYBVQfIfkHpr3Ak bp0&hl=en&ei=Eohttp://gunnargorder.com/2009/12/21/interest-rate-theories/ http://www.investopedia.com/terms/i/interestrate.asp http://www.wikinvest.com/concept/Interest_Rates http://en.wikipedia.org/wiki/Saving http://www.worldbank.org/Bank of Namibia .Annual Reports.2010

https://www.bon.com.na/docs/pub/BoN%20AR%202010.pdf http://www.ssag.sk/SSAG%20study/EKO/RELATIONSHIP%20BETWEEN%20GDP.pdf http://data.worldbank.org/country http://en.wikipedia.org/wiki/Interest_rate http://en.wikipedia.org/wiki/Economic_growth http://www.google.com/search?ie=UTF-8&oe=UTF8&sourceid=navclient&gfns=1&q=theories+of+interest+ratyes http://www.google.com/search?ie=UTF-8&oe=UTF8&sourceid=navclient&gfns=1&q=theiories+of+investment http://www.google.com.na/search?hl=en&client=firefox-a&rls=org.mozilla%3AenGB%3Aofficial&channel=s&biw=1600&bih=707&q=Casual+Relationship+between+interest+rates+and+G DP&oq=Casual+Relationship+between+interest+rates+and+GDP&aq=f&aqi=&aql=1&gs_sm=e&gs_upl= 157922l184329l0l185223l52l51l1l33l33l1l2230l9893l2.2.1.4.2.0.5.9-1l17l0

http://jbsq.org/wp-content/uploads/2011/03/March-2011-5D.pdf

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Appendix A Quarterly data: obs

DR

GDPC

GFCF

LNGDPCP

PLR

RR

1999:1

10.81583

3.372299

12.03829

24.22692

18.48417

14.08333

1999:2

10.81583

3.372299

12.03829

24.22692

18.48417

14.08333

1999:3

10.81583

3.372299

12.03829

24.22692

18.48417

14.08333

1999:4

10.81583

3.372299

12.03829

24.22692

18.48417

14.08333

2000:1

7.390000

3.488452

11.08940

24.26121

15.27833

11.27083

2000:2

7.390000

3.488452

11.08940

24.26121

15.27833

11.27083

2000:3

7.390000

3.488452

11.08940

24.26121

15.27833

11.27083

2000:4

7.390000

3.488452

11.08940

24.26121

15.27833

11.27083

2001:1

6.794167

1.180370

11.97315

24.27294

14.53167

10.45833

2001:2

6.794167

1.180370

11.97315

24.27294

14.53167

10.45833

2001:3

6.794167

1.180370

11.97315

24.27294

14.53167

10.45833

2001:4

6.794167

1.180370

11.97315

24.27294

14.53167

10.45833

2002:1

7.809167

4.787081

13.86396

24.31970

13.83750

11.66667

2002:2

7.809167

4.787081

13.86396

24.31970

13.83750

11.66667

2002:3

7.809167

4.787081

13.86396

24.31970

13.83750

11.66667

2002:4

7.809167

4.787081

13.86396

24.31970

13.83750

11.66667

2003:1

8.755000

4.239333

20.06219

24.36122

14.70083

10.91667

2003:2

8.755000

4.239333

20.06219

24.36122

14.70083

10.91667

2003:3

8.755000

4.239333

20.06219

24.36122

14.70083

10.91667

2003:4

8.755000

4.239333

20.06219

24.36122

14.70083

10.91667

2004:1

6.351667

12.27179

15.67984

24.47697

11.38917

7.625000

2004:2

6.351667

12.27179

15.67984

24.47697

11.38917

7.625000

2004:3

6.351667

12.27179

15.67984

24.47697

11.38917

7.625000

2004:4

6.351667

12.27179

15.67984

24.47697

11.38917

7.625000

2005:1

6.240000

2.528175

16.21803

24.50194

10.61000

7.125000

2005:2

6.240000

2.528175

16.21803

24.50194

10.61000

7.125000

2005:3

6.240000

2.528175

16.21803

24.50194

10.61000

7.125000

2005:4

6.240000

2.528175

16.21803

24.50194

10.61000

7.125000

2006:1

6.298333

7.072992

18.43118

24.57028

11.18083

7.666667

2006:2

6.298333

7.072992

18.43118

24.57028

11.18083

7.666667

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2006:3

6.298333

7.072992

18.43118

24.57028

11.18083

7.666667

2006:4

6.298333

7.072992

18.43118

24.57028

11.18083

7.666667

2007:1

7.546667

5.374256

16.14504

24.62263

12.88417

9.625000

2007:2

7.546667

5.374256

16.14504

24.62263

12.88417

9.625000

2007:3

7.546667

5.374256

16.14504

24.62263

12.88417

9.625000

2007:4

7.546667

5.374256

16.14504

24.62263

12.88417

9.625000

2008:1

8.384167

4.300000

14.67501

24.66473

13.73667

10.45833

2008:2

8.384167

4.300000

14.67501

24.66473

13.73667

10.45833

2008:3

8.384167

4.300000

14.67501

24.66473

13.73667

10.45833

2008:4

8.384167

4.300000

14.67501

24.66473

13.73667

10.45833

2009:1

6.241667

-0.700000

15.59103

24.65771

11.11833

7.708333

2009:2

6.241667

-0.700000

15.59103

24.65771

11.11833

7.708333

2009:3

6.241667

-0.700000

15.59103

24.65771

11.11833

7.708333

2009:4

6.241667

-0.700000

15.59103

24.65771

11.11833

7.708333

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Bachelor of Technology in Economics Research Project