An Investigation Of The Relationship Between Private Consumption Expenditure And Lending Rate In Namibia

ABSTRACT

The study examines the relationship between private consumption expenditure and lending rate

in Namibia, with the aim of highlighting the effect of lending rate as an important factor that

determine the private consumption expenditure growth. The study is based on annual data

covering the period from 1980 to 2011. The Unrestricted Vector Auto – regression Model

(VECM) procedure was adopted. Two proxies for real wealth and real disposable income are

used in the study. The results show that real private consumption expenditure in Namibia adjusts

fast to changes in nominal lending rate, real wealth and real disposable income and that the

effects wear off in the long run. The results also reveals that the real private consumption

expenditure in Namibia is significantly explained by the changes in lending rate, income and

wealth and the effects confirms with the theories of consumption. Real wealth and real

disposable income have a positive impact on real private consumption expenditure, while

nominal lending rate has a negative impact. The negative impact realized from the findings

shows that in Namibia, the relationship between private consumption expenditure and lending

rate depends on the magnitude of the substitution effect. A fall in lending rate by the commercial

banks will be an appropriate instrument for stimulating the levels of private consumption

expenditure in Namibia. With income and wealth playing a vital role in influencing consumption

levels of households, fiscal policies, through its impact on disposable income and wealth, should

be considered as effective tools in promoting private consumption expenditure.