Interest Rates, Government and Private Investments and Pakistan Economy: An Analysis of Three Decades

Abstract

The paper investigates the relationship between interest rates and private investment with the economic growth in Pakistan. One of the primary plans of economic policies is to increase investment that is important for better economic performance .using time series analysis and annual data from 1980 - 2010. The structural equation model is used to find out the relations of the variables in the model with help of the regression equations. The empirical results indicate that private investment, government expenditures and labor force have significant positive effect on gross domestic product but foreign direct investment has negative and statistically significant relation with gross domestic product. There also exists a unique long-run relationship between economic growth and its determinants, including interest rate. The results imply that the behavior of interest rate is important for economic growth in view of the relationships between interest rates and investment and investment and growth. Private investment, government expenditure and foreign direct investment first individually estimated than used the estimated values in main equation of the study.

Keywords: Gross domestic product, interest rate, private investment.