Interest Rate – Private Capital Formation Nexus in South Africa: Bounds Test Approach

Abstract

The study uses the annual time series data for the period 1975 – 2012 to empirically examine the impact of monetary policy on private capital formation in South Africa with the view to establish any long-run relationship. The unit root test was conducted prior to regression using the Dickey-Fuller Generalised Least Squares (DF-GLS) and the Ng – Perron tests. The Granger causality test was also conducted to establish the direction of causation between variables included in the model. The unit root test results reveal that inflation, gross private capital formation and real exchange rate are stationary at first difference while real interest rate is stationary at levels.The bounds test approach asserts that variables could still drift together even when they are integrated of different orders (Pesaran, 2001). Cointegration test indicates an existence of long-run relationship among the variables included using Autoregressive Distributed Lag(ARDL)-ECM cointegration procedure advanced by Pesaran et al.(2001). The results of this study indicate that the cost of capital (interest rate) exerts a significant and negative impact on South Africa’s private capital formation.

DOI: 10.5901/mjss.2014.v5n1p181