Interest Rate On Investment In Zimbabwe Case Study

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PROVISIONAL TITLE

An analysis of the effects of interest rate on investment in Zimbabwe (2009-2015).

BACKGROUND AND PROBLEM STATEMENT

Since the adoption of a multicurrency system in Zimbabwe in 2009, the Central Bank’s power to control or influence interest rates structure disappeared. It is the monetary policy instruments that give the direction of interest rates in an economy. The broad money supply is neither an option because of the simple reason that the Central Bank cannot influence that anymore due to the multicurrency regime that the country embarked on in 2009.

High demand for working capital across all sectors of the economy is evident. Business needs to retool, innovate, reposition and possibly win back the market share that …show more content…

The basic definition of an interest rate is simply the cost of borrowing money. It is the cost associated with acquiring credit, whether buying a car, getting a mortgage, or taking a vacation. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha&Acha …show more content…

Investment depends upon the rate of interest involved in getting funds from the market by investors, while economic growth to a large extent depends on the level of investment. If interest rate is high, investment is at low level and when interest rate falls, investment will rise.

Jorgenson (1963), in his paper “Capital Theory and Investment Behavior”, provided the effect of real interest rates on investment spending in an investment equation. He derived the desired stock of capital as a function of real output and the opportunity cost of capital. In this approach, a representative firm maximizes the present value of its future cash flows. The desired capital stock is directly related to output and inversely related to the cost of capital. A decrease in the real interest rate lowers the opportunity cost of capital and, therefore, raises the desired capital stock and investment

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