Asymmetric Impact of Interest Rate on Economic Growth in Kenya

Talknice Saungweme; Glenda Maluleke; Nicholas M Odhiambo

doi:10.37075/FABA.2025.1.06

Authors

Talknice Saungweme Department of Economics, University of South Africa, South Africa https://orcid.org/0000-0003-1255-7837
Glenda Maluleke Department of Economics, University of South Africa, South Africa https://orcid.org/0000-0002-5234-3115
Nicholas M Odhiambo Department of Economics, University of South Africa, South Africa https://orcid.org/0000-0003-4988-0259

DOI:

https://doi.org/10.37075/FABA.2025.1.06

Keywords:

Economic growth, Interest rates, Kenya, NARDL

Abstract

Purpose: This study re-examines the relationship between interest rates and economic growth, focusing on the asymmetric effects of lending interest rates on Kenya's economic performance.

Design/Methodology/Approach: The study applied the nonlinear autoregressive distributed lag (NARDL) model to ascertain the distinct impacts of positive and negative interest rate shocks on economic growth in both the short and long run. It uses yearly time series data spanning the years 1980-2021.

Findings: The results of the cointegration tests found evidence supporting the existence of an asymmetric long-run relationship, while the Wald test results show that there is a long-run and short-run asymmetry link between interest rates and economic growth in Kenya. On average, positive changes in lending interest rates have no significant impact on economic growth in Kenya, both in the short and long run. However, negative interest rate shocks spur economic growth in the short run but impede growth in the long run.

Research Limitations/Implication: The study is limited to the Kenyan context and the dataset range of 1980–2021. Future research could explore thresholds for optimal interest rate levels and include a broader range of countries for comparative analysis.

Originality/Value: This study uniquely applies the NARDL framework to Kenya, providing new insights into the asymmetric impact of interest rates on economic growth.

Paper Type: Research Paper.

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