Relationships between construction output, interest rates and construction loans

Countries use a variety of policy tools to stimulate sectors, increase their output and thus revive economic growth. One of the most important of these is to benefit from monetary policy instruments for influencing economic activity through direct interventions on interest rates and the money supply. According to this view, changes in money supply trigger a chain of reactions, starting from interest rates to investments and finally leading to a change in output. When contractionary or expansionary policies are adopted in this manner, sectoral output patterns in an economy change. Thus, relationships between output, interest rates and credit demand have long been the center of debates in economic literature. While the mechanisms empirically examining the causal links between these variables have been tested by a large number of economic studies covering various periods and countries, industrial responses to monetary policy options are still being explored. This paper presents the initial findings of a broader research on the relationships between interest rates, bank loans to the construction sector and construction output which are all affected by the adoption of different monetary transmission mechanisms. The paper concludes by insights into the prudence required for the interpretation of results and how the next phase of the research attempts to tackle these issues