The Effect of Financial Repression on Total Investment: An Instrumental Variable Method

Authors

  • Romuel E. Zamoranos

Keywords:

financial repression, investment, savings, interest, reserve ratio

Abstract

Financial repression was characterized in various government policies to control certain macroeconomic variables like interest rate and reserve ratio requirement. Many studies and literatures mentioned that the repressed financial sectors discourage both savings and investments because of lower rate of return and restricting bank portfolio to productive investments. The Two-Stage Least Square (TSLS) method was used to estimate the effect of the explanatory variables such as interest rate and reserve ratio on investment. Using different statistical tests, the results revealed that all variables employed in the model had passed the unit root test or test for stationarity which signified that the regression of the variables was feasible. Furthermore, the F-test and Hausman test indicated that the instrument is relevant. The OLS and TSLS were significantly different and can be concluded that instrument variable is exogenous. There was a very weak negative correlation between investment and its determinants while savings has a strong positive correlation to investments. Although, interest rate and reserve ratio had no significant effect on investment, it exerted a negative influence in investment which followed the theoretical expectation. The study revealed that there was strong evidence that savings had a major role on investment.

Published

2018-10-18