Relationship between lending interest rate, inflation rate and capital formation in Kenya


  • Titus Mosoti Ogero Rongo University, Kenya



The study seeks to understand the relationship between lending interest rate, inflation rate and capital formation in Kenya. Time series from World Bank for the 1988 to 2018 is employed. Development of literature is guided by expectation theory, classical theory of interest rate and the institutionalist theory of capital formation. The study finds capital formation, lending interest rate ad inflation rate time series data to be stationary at the 5% level of significance. This leads to the checking of the lag order used and estimating of VAR model. The results indicate that, current year’s; capital formation, inflation rate and lending interest rate are insignificant in determining next year’s level of capital formation. First lag of inflation rate is found positively significant in influencing lending interest rates as well as the first lag of lending interest rate is found significant on influencing itself. Capital formation first lag is found to be negatively significant in determining inflation rate. Lastly, inflation rate first lag is found to be positive


Download data is not yet available.


Baldwin Ranson. (1987). The institutionalist theory of capital formation. Journal of Economic Issues, Vol.21 No. 3 pp. 1265-1278.

Boyd, John H., Ross Levine, and Bruce D. Smith (1995). Inflation and financial market performance Manuscript, Federal Reserve Bank of Minneapolis

Defina, H.R. (1983). The Link between Savings and Interest Rate. Key Element in the tax policy. The Federal Reserve Bank of Philadelphia.

Fisher, I. (1930). The theory of interest rates. Macmillan publishers: New York, USA

Igbatayo, S., & Agbada,O.A. (2012). Inflation, Savings and Output in Nigeria: A Var approach. Journal of emerging trends in economics and management sciences. (447- 453).

Ikhide, S., & Alonade, A. (2001). Financial sector reforms, macro -economic instability and the order of economic liberalization, the evidence from Nigeria. Economic Research Consortium research. Paper 112.

Krieckhaus, J. (2002). Reconceptualizing the developmental state: public savings and economic growth. World development, 13(10).

Lawrence J. Christiano. (2012). Christopher A. Sims and Vector Autoregressions, Scandinavian Journal of Economics, 114(4), 1082-1104

McKinnon, R. (1973). Money and Capital in Economic Development. Washington D.C. Brookings institution.

Mishkin, S.F. (2010). The Economies of Money, Banking and Financial markets 9 thEdition Addisson Wesley.

Modigliani, F. (1966).The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital. ProQuest Information and Learning Company.

Rutherford, D. (2012). In the shadow of Adam Smith. Founders of Scottish economics. Pulgrave Macmillan.

Sangmok C., Bruce D. Smith, and John H. Boyd. (1995). Inflation, financial markets and capital formation, Federal Reserve Bank of Minneapolis, Working paper 556

Shaw, E.S. (1973). Financial deepening in Economic Development. New York, Oxford University press.

Sims, C. A. (1980a), Macroeconomics and Reality, Econometrica 48, 1–48




How to Cite

Ogero, T. M. (2021). Relationship between lending interest rate, inflation rate and capital formation in Kenya. International Journal of Business, Technology and Organizational Behavior (IJBTOB), 1(5), 339–347.