An Empirical Analysis of the Determinants of Interest Rates in Ghana

ABSTRACT

This paper provides an empirical analysis of the determinants of the bank lending rate in Ghana using annual time series data from 1970 to 2013. We found evidence of a long-run equilibrium relationship between the average lending rate charged by commercial banks and its determining factors. In the long run, bank lending rates in Ghana are positively influenced by nominal exchange rates and Bank of Ghana’s monetary policy rate but negatively with fiscal deficit, real GDP and inflation. We also find positive dependence of the bank lending rate on exchange rates, and the monetary policy rate both in the short and long run. Specifically, our findings reveal that the Bank of Ghana’s monetary policy rate and the exchange rate, by far, show strong contemporaneous effects on the average bank lending rate in Ghana.

KEYWORDS:

• Ghana
• interest rate
• ARDL
• commercial banks
• monetary policy
• fiscal policy

Notes

1. While the structural break can be regime change, change in policy direction or external shocks affecting the economic variable. The Perron and Vogelsand (1992) Innovation Outlier model is robust for detecting gradual endogenous changes in a time series data compared to other structural break estimators. Shrestha and Chowdhury (2005) provide extensive discussions of structural break tests.

2. Statistics from Bank of Ghana’s Monetary Policy Committee Press Release in 2011 and 2013. Retrieved April 25, 2016 from www.bog.gov.gh/privatecontent/MPC_Press_Releases/financial%20stability%20report%20%20-%20september%202011.pdf; www.bog.gov.gh/privatecontent/MPC_Press_Releases/Financial%20Stability%20Report%20-%20February%202013.pdf