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Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka

Received: 31 March 2023     Accepted: 25 April 2023     Published: 10 May 2023
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Abstract

The interest rate is one of the main tools used to governor monetary policy in Sri Lanka. The main objective of this research was identifying the Macroeconomic variables that Influence to determine the Interest Rate: Evidence from Sri Lanka. Changes in macroeconomic variables affect to determine interest rate. At present, there are some consensus on the answers to these questions. This paper examines to identify Macroeconomic variables that influence the determine the interest rate in Sri Lanka and identify the relationship between interest rate and macro-economic variables. The model of this study was estimated using quarterly data from 2004:Q1 to 2015:Q4. This study uses Macro-economic variables such as money supply, budget deficit, inflation, and economic growth. This study uses Average Weighted Prime Lending Rate (AWPR), and 3-month T bill rate as benchmark interest rates in Sri Lanka. Variables were initially tested for stationery and autocorrelation, and both inflation and budget deficit were found as non-stationary, the first difference of these variables was considered. There was no autocorrelation amongst any of the variables. Granger causality tests use for finding the interrelationships between the variables in the model. looking at the overall models, it was seen that both models was significantly represented by their F-values, only the first difference of inflation and real GDP were significant in both models. There was no direct causation of interest rates from changes in inflation and real GDP. It was observed that collectively both money supply and budget deficit had a significant impact on the level of interest rates. The R-squared values are in the range of 25%. The conclusion of the study is the explanatory variables are weakly affected to determining interest rates in Sri Lanka during the reference period. Further found that all the macro-economic variables showed a positive linear relationship with the T bill rate and AWPR in Sri Lanka.

Published in International Journal of Economic Behavior and Organization (Volume 11, Issue 1)
DOI 10.11648/j.ijebo.20231101.13
Page(s) 17-25
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Determination, Evidence, Stationery and Autocorrelation, Average Weighted Prime Lending R

References
[1] Ari Aisen; David Hauner February 1, 200, Budget Deficits and Interest Rates: A Fresh Perspective.
[2] Cebula, R. J., (2005); ‘Recent empirical evidence on the impact of the primary budget deficit on nominal longer-term treasury note interest rate yields’, Global Business and Economics Review, Vol. 7, No. 1, pp. 47–58.
[3] Central Bank of Sri Lanka; Several Issues of the Annual Report (1997-2014).
[4] Deutsche Bank Research (2001), “Real Interest Rates: Movements and Determinants”, Deutsche Bundesbank Monthly Report July 2001.
[5] Dheerasinghe, Rupa., (19990, “The Impact of Public Debt on Interest Rates in Sri Lanka”, Staff studies, Central Bank of Sri Lanka.
[6] Fernando, D. J. G., (1991); “Financial Reforms in Sri Lanka 1977-1987”, Central Bank of Sri Lanka.
[7] Fry, Maxwell J., (1991); Money, Interest, and Banking in Economic Development, The Johns Hopkins University Press.
[8] Gujarati, Damodar N, (1988); Basic econometrics: McGraw-Hill Book Company.
[9] Gupta, Suraj B., (1998); Monetary Economics-Institutions, Theory & Policy, S. Chand & Company Ltd.
[10] Jayamaha, R., (1989), “The Monetary Transmission Mechanism in Sri Lanka”, Central Bank of Sri Lanka.
[11] Karunathilake, H. N. S., (1986); The Banking and Financial System of Sri Lanka, Centre for Demographic and Socio-Economic Studies.
[12] Mishkin, Frederic S., (1997); The Economics of Money, Banking & Financial Markets, Addison Wesley.
[13] Mehra Yash P (1995), Some key empirical determinants of short-term nominal interest rates. Economic Quarterly issue Sum, 33-51.
[14] Monnet, Cyril., and Weber, Warren E., (2001), “Money and Interest Rates”, Federal Reserve Bank of Minneapolis Quarterly Review, Fall 2001, Vol. 25, No. 4, pp. 2-13.
[15] Mehra (1995):” Determents of short-term interest rates over the period 1995:1 to 1994:3. Federal ReserVE Bank of Richmond Economic Quarterly Volume 81/3 Summer 1995.
[16] Moschitz, Julius., (2004), “The determinants of the Overnight interest Rate in the Euro Area”, European Central Bank, Working Paper Series No. 393 September 2004.
[17] Patterson, G. B., (1999): “The Determination of Interest Rates”, European Parliament, Economic Affairs Series ECON-116EN, December 1999.
[18] Poole, William, (2003), “Economic Growth and the Real Rate of Interest”, Federal Reserve Bank of St. Louis.
[19] Roley, V. Vance., and Sellon, Gordon H. Jr., (1995); “Monetary Policy Actions and Long-Term Interest Rates”, Federal Reserve Bank of Kansas City, Economic Review.
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  • APA Style

    Balasoooriya Mudiyanselage Wasanthi Shyamika Balasoooriya. (2023). Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka. International Journal of Economic Behavior and Organization, 11(1), 17-25. https://doi.org/10.11648/j.ijebo.20231101.13

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    ACS Style

    Balasoooriya Mudiyanselage Wasanthi Shyamika Balasoooriya. Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka. Int. J. Econ. Behav. Organ. 2023, 11(1), 17-25. doi: 10.11648/j.ijebo.20231101.13

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    AMA Style

    Balasoooriya Mudiyanselage Wasanthi Shyamika Balasoooriya. Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka. Int J Econ Behav Organ. 2023;11(1):17-25. doi: 10.11648/j.ijebo.20231101.13

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  • @article{10.11648/j.ijebo.20231101.13,
      author = {Balasoooriya Mudiyanselage Wasanthi Shyamika Balasoooriya},
      title = {Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka},
      journal = {International Journal of Economic Behavior and Organization},
      volume = {11},
      number = {1},
      pages = {17-25},
      doi = {10.11648/j.ijebo.20231101.13},
      url = {https://doi.org/10.11648/j.ijebo.20231101.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20231101.13},
      abstract = {The interest rate is one of the main tools used to governor monetary policy in Sri Lanka. The main objective of this research was identifying the Macroeconomic variables that Influence to determine the Interest Rate: Evidence from Sri Lanka. Changes in macroeconomic variables affect to determine interest rate. At present, there are some consensus on the answers to these questions. This paper examines to identify Macroeconomic variables that influence the determine the interest rate in Sri Lanka and identify the relationship between interest rate and macro-economic variables. The model of this study was estimated using quarterly data from 2004:Q1 to 2015:Q4. This study uses Macro-economic variables such as money supply, budget deficit, inflation, and economic growth. This study uses Average Weighted Prime Lending Rate (AWPR), and 3-month T bill rate as benchmark interest rates in Sri Lanka. Variables were initially tested for stationery and autocorrelation, and both inflation and budget deficit were found as non-stationary, the first difference of these variables was considered. There was no autocorrelation amongst any of the variables. Granger causality tests use for finding the interrelationships between the variables in the model. looking at the overall models, it was seen that both models was significantly represented by their F-values, only the first difference of inflation and real GDP were significant in both models. There was no direct causation of interest rates from changes in inflation and real GDP. It was observed that collectively both money supply and budget deficit had a significant impact on the level of interest rates. The R-squared values are in the range of 25%. The conclusion of the study is the explanatory variables are weakly affected to determining interest rates in Sri Lanka during the reference period. Further found that all the macro-economic variables showed a positive linear relationship with the T bill rate and AWPR in Sri Lanka.},
     year = {2023}
    }
    

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  • TY  - JOUR
    T1  - Macroeconomic Variables That Influence the Determination of Interest Rate: Evidence from Sri Lanka
    AU  - Balasoooriya Mudiyanselage Wasanthi Shyamika Balasoooriya
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    DO  - 10.11648/j.ijebo.20231101.13
    T2  - International Journal of Economic Behavior and Organization
    JF  - International Journal of Economic Behavior and Organization
    JO  - International Journal of Economic Behavior and Organization
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    PB  - Science Publishing Group
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    UR  - https://doi.org/10.11648/j.ijebo.20231101.13
    AB  - The interest rate is one of the main tools used to governor monetary policy in Sri Lanka. The main objective of this research was identifying the Macroeconomic variables that Influence to determine the Interest Rate: Evidence from Sri Lanka. Changes in macroeconomic variables affect to determine interest rate. At present, there are some consensus on the answers to these questions. This paper examines to identify Macroeconomic variables that influence the determine the interest rate in Sri Lanka and identify the relationship between interest rate and macro-economic variables. The model of this study was estimated using quarterly data from 2004:Q1 to 2015:Q4. This study uses Macro-economic variables such as money supply, budget deficit, inflation, and economic growth. This study uses Average Weighted Prime Lending Rate (AWPR), and 3-month T bill rate as benchmark interest rates in Sri Lanka. Variables were initially tested for stationery and autocorrelation, and both inflation and budget deficit were found as non-stationary, the first difference of these variables was considered. There was no autocorrelation amongst any of the variables. Granger causality tests use for finding the interrelationships between the variables in the model. looking at the overall models, it was seen that both models was significantly represented by their F-values, only the first difference of inflation and real GDP were significant in both models. There was no direct causation of interest rates from changes in inflation and real GDP. It was observed that collectively both money supply and budget deficit had a significant impact on the level of interest rates. The R-squared values are in the range of 25%. The conclusion of the study is the explanatory variables are weakly affected to determining interest rates in Sri Lanka during the reference period. Further found that all the macro-economic variables showed a positive linear relationship with the T bill rate and AWPR in Sri Lanka.
    VL  - 11
    IS  - 1
    ER  - 

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Author Information
  • Department of Business Economics, University of Colombo, Colombo, Sri Lanka

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