Understanding the impact of Commercial Banks Lending Rate on Economic Growth: An Empirical Evidence from Ghana.

Abstract The main objective of this paper is to investigate the impact of lending rate on economic growth in Ghana. To do this, we employ the autoregressive distributed lags model (ARDL) and the Toda and Yamamoto (1995) causal approach as estimation strategy. The estimates from the ARDL model suggest that ceteris paribus one percent increase in lending rate generates approximately 0.15 decrease in economic growth of Ghana in the long. In the short run, one percent increase in lending rate also generates approximately 0.112 percent decrease in economic growth. Contrary to the widespread belief that lending rate induce economic growth, we find that gross domestic product rather spurs lending rate, using Toda and Yamamoto (1995) causal approach. Our findings suggest that monetary authorities should embark on policy interventions that aim at taming lending rate towards growth enhancing targets. This will encourage individuals, firms and other institutions to borrow from commercial banks to increase investment and consumption to accelerate economic growth. Other policy interventions include strengthening inflation targeting policy to reduce and stabilize inflation while taming exchange rate, monetary policy and treasury bill rate towards economic growth enhancing targets.