Macroeconomic instability and interest rate spreads in Ghana

Abstract

This paper investigates the extent to which interest rate spreads is associated with macroeconomic instability in Ghana. Using the Maastricht Criteria, quarterly data on inflation, budget deficit, prime rate, external debt and exchange rate were collected from 2008 to 2018 to construct a composite macroeconomic instability index. The resulting index was used to evaluate the long‐run and short‐run relationship between macroeconomic instability and interest rate spreads with the aid of the autoregressive distributed lag and bounds test approach to cointegration. The results revealed that macroeconomic instability had a positive long‐run and short‐run relationship with interest rate spreads. Non‐performing loans and loan‐to‐deposit ratio are found to be negatively related to interest rate spreads both in the short and long run, although the relationship is not statistically significant. From a policy‐oriented point of view, it is recommended that policy makers concentrate on managing macroeconomic instability as a means of boosting savings and investment.

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