THE NEXUS BETWEEN INVESTMENT AND INTEREST RATE: NEW DIMENSIONS FOR PAKISTAN

Abstract

The nexus between investment and interest rate is always considered essential to analyze the economic activity as these variables are important economic indicators in defining macroeconomic activity. However, the unchanged condition of investment in Pakistan has raised the cost of investment and crates uncertainty in investors. The paper investigates the link between rate of interest and investment to incorporate a new dimension of call money rate that may enhance the investment opportunities in Pakistan, employing time series analysis for the time span of 1973 - 2015. The ARDL Bound Testing Approach and ECM are employed to capture both the long and short-run dynamics of the variables in the model. The results of the study indicate that the call money rate has significant effect on investment and thus on economic growth. Therefore, the preparation and implementation of financial policies may increase the investmentfriendly rate of interest to stimulate economic growth in Pakistan.