The effect of Interest Rate on Economic Growth in Burundi

Abstract

The methodology used in this research was a longitu time series to analyze the effect of interest rate on economic growth in Burundi over the period of 2006-2019. This study used time series techniques to collect secondary data on gross domestic product (GDP), interest rate, inflation and gross investment in Burundi. Data analysis was done through a multiple linear regression to analyze the relationship between interest rates and economic growth. On the other hand, the results for from R squared were used to analyze the importance of the interest rate for economic growth in Burundi. The Augmented Dickey-Fuller technique and the Phillips Perron (PP) test were used for the stationary test. From the findings on the Adjusted R squared, the study found that there was variation of 78.11% on economic growth of Burundi due to changes in real interest rate, inflation and gross investment. The multiple linear regression output indicates that there was a strong positive relationship between interest rate and economic growth. The study further revealed that real interest rate, inflation and gross investment positively influence economic growth of Burundi. At 5% level of significance and 95% level of confidence, real interest rate, inflation and gross investment were strongly significant. The predicted model was assessed using Shapiro Wilk W test, test for heteroscedasticity, test for serial correlation and multicollinearity and found to be a valid model for decision making. From these findings, that there is need for the government to control real interest rate as it was found that real interest rates strongly and positively influenced economic growth of Burundi. Similarly, it was recommended that inflation and gross investment should be controlled because they are considered useful as they helps boost consumer demand and consumption and driving to economic growth.