Interest rate liberalization and economic growth in Zambia : a dynamic linkage

This paper examines the dynamic impact of interest ratereforms on economic growth in Zambia—using two models in a stepwisefashion. In the first model, the efficacy of interest rate liberalization isexamined by regressing the interest rate on the level of financial deepening.In the second model, the causal relationship between financial depth andeconomic growth is examined by incorporating savings as an intermittentvariable in the bivariate setting, thereby creating a simple trivariate model.Using the cointegration-based error correction model, the study finds strongsupport for the positive impact of interest rate liberalization on financialdeepening. In addition, the study finds that financial deepening,which resultsfrom interest rate liberalization, Granger causes economic growth. The resultsapply irrespective of whether the causality is estimated in the short run orin the long run. Other results show that: (1) lagged financial depth leads tofurther financial deepening; (2) savings and economic growth Granger causeeach other; and (3) financial development Granger causes savings in the longrun.