Interest Rate Fluctuation, Savings Mobilization, and Capital Formation

Abstract

This paper focuses on the relationship among interest rate, savings, and capital formation which are macroeconomic indicators of Bangladesh, and provides a scenario of the economy using data from 1976 to 2021. Our analysis performed econometric models of the unit root test, cointegration test, OLS regression model, multicollinearity test, correlation matrix, VECM, and Granger causality test. The regression reveals that interest rate has a negative and statistically significant relationship with capital formation and a positive and statistically insignificant relationship with domestic savings. However, domestic savings and capital formation are negative and statistically insignificant in Bangladesh’s economy. The VECM exhibits a long-term equilibrium association between interest rate and capital formation. Furthermore, Causality implies that there is a unidirectional causal relationship running from domestic savings and capital formation to interest rate. Yet, saving has no causal on capital formation. This outcome has a fantastic execution that can effortlessly stabilize the economy from any unanticipated circumstances and the economy should be concerned with this new study about maintaining a balance with these indicators. If the outcomes of this research work are carried out into policy execution, that is, proper coordination of regulations on economic variables, progress in the real sector of the economy, velocity of expansion of capital growth, and grass-root mobilization of savings from the surplus market to the deficit market, it will lead to experienced long-run prosperity. We also recommend Policy formulators to accomplish our results properly for the betterment of savings and capital flows in Bangladesh.