10 1108 - Jbsed 04 2021 0038
10 1108 - Jbsed 04 2021 0038
10 1108 - Jbsed 04 2021 0038
https://www.emerald.com/insight/2635-1374.htm
Abstract
Purpose – This empirical paper aims to examine the impact of interest rate (IR) and political instability
(POLINS) on Palestine’s domestic private investment.
Design/methodology/approach – A set of econometric techniques of time series data are adopted to meet
the study objectives. They include regression analysis, unit root tests, cointegration test, ARDL & Bound tests,
VAR test and Granger causality test.
Findings – The study’s primary results complement the neoclassical approach, which states that the IR is
negatively associated with domestic private investment. The empirical results reveal that there is no long-run
relationship. Also, there is no causality between domestic investment and lending rates. Accordingly, these
findings alert policymakers to draw a series of steps to minimize the IR at a minimum to stimulate investment
for improved economic growth and development.
Practical implications – There is still no national currency in Palestine. The Palestinian Monetary
Authority (PMA) is advised to set an appropriate ratio of the IR for the currencies-in-circulation in Palestine for
boosting investment and economic development.
Originality/value – This paper provides new background information to both policymakers and researchers
on the main determinants of investment in Palestine using econometric analysis. Accordingly, this critical issue
is required to be examined in Palestine for stimulating investment.
Keywords Econometrics, Investment, Interest rate, Palestine, Times series
Paper type Research paper
1. Research background
In 1936, the Keynesian theory was developed by John Maynard Keynes to investigate the
great depression. Especially, it is considered a demand-side theory, which focuses on changes
in the economy in the short term. However, investment as one of the main components of the
aggregate demand is worthy to be considered for stimulating economic growth, economic
development, GDP, employment and prosperity.
© Ibrahim M. Awad, Ghada K. Al-Jerashi and Zaid Ahmad Alabaddi. Published in Journal of Business
and Socio-economic Development. Published by Emerald Publishing Limited. This article is published
under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute,
Journal of Business and Socio-
translate and create derivative works of this article (for both commercial and non-commercial purposes), economic Development
subject to full attribution to the original publication and authors. The full terms of this licence may be Vol. 1 No. 1, 2021
pp. 71-86
seen at http://creativecommons.org/licences/by/4.0/legalcode Emerald Publishing Limited
The authors thank the colleagues from Al-Quds University and internationally for their assistance e-ISSN: 2635-1692
p-ISSN: 2635-1374
and their significant comments that significantly improved the manuscript. DOI 10.1108/JBSED-04-2021-0038
JBSED In Palestine, there is an insignificant contribution of bank lending to GDP because banks
1,1 exhibit apathy in lending to the economy’s production sector due to the high level of risk
involved (Awad and Karaki, 2019). The Palestinian government is advised to raise awareness
campaigns to enhance the community’s awareness about the necessity of adherence to laws
and public interest regulations. Accordingly, the underground economy should be integrated
with the formal economy instead of reducing it according to a clear plan to achieve that
integration (Awad and Alazzeh, 2020).
72 However, this study addresses two main determinants of domestic private investment.
The interest rate (IR) is the main factor that may affect private investment. IRs in Palestine are
high compared with developing and developed. For instance, Israel, the USA and Japan have
very low and close to zero IR policy. Moreover, the IR in Egypt and Jordan is significantly
lower than the IR in Palestine.
In contrast, according to the Palestinian Monetary Authority (PMA) the average IR in
Palestine between 2008 and 2017 was about 6.94%. The political situation variable is also
considered, which is likely to discourage businesses from undertaking investment projects.
Previous studies also suggest that economic growth and political instability (POLINS) are
strongly linked. The uncertainty associated with an unstable political environment may
reduce investment or cause increases in the price level, which leads to a high level of inflation
and, as a result, a lower national growth rate.
Given that, this empirical study tends to find out to what extent the IR and POLINS affect
domestic private investment in Palestine from 2008 to 2017. This paper aims to examine the
impact of IR and POLINS on Palestine’s domestic private investment.
The study is organized as follows. The next section reviews some of the most important
contributions in the literature to locate this paper’s policy aims. Section 4 describes the
methods employed to analyze the data. Section 5 presents the empirical findings of the paper
and discussions these results. Finally, concluding remarks and policy implications are in
Section 6.
4. Methodology
In the context of this empirical study, time series data were undertaken over the period: (from
quarter 1/2008 to quarter 4/2017), the data were collected from the PMA and the Palestine
Central Bureau of Statistics (PCBS) (PMA, 2012; and PCBS, 2017). To obtain a better scale to
observe the scatterplot’s data, we transformed the study variables to log so that the natural
logarithm was considered in the study. Further, a set of econometric techniques of regression
analysis, unit root tests, cointegration test, ARDL & Bound tests, VAR test, Granger causality
test and autocorrelation test were adopted to meet the study objectives.
This study is distinguished from other previous studies by using several econometric
techniques, most of the previous studies that are mentioned above used at most four
econometric techniques, this issue may rich this study in the econometric analysis.
where β0 is constant and β1 ; β2 ; β3 are the parameters of the econometric model, they describe
the direction and the strength between variables, « is the residual.
The dependent variable is the domestic private investment (INV).
(1) Gross domestic product (GDP), this variable was chosen based on economic theory
and previous research.
(2) IR, this variable was chosen based on economic theory and previous research.
(3) POLINS, a dummy variable (0, 1). When there is POLINS, it gets a value of 1, when
there is no POLINS, it gets a value of 0.
Logarithmic transformations of variables were used to handle situations where a non-linear
relationship exists between the independent and dependent variables. Stability tests were
also conducted to examine the data stability to decide whether the model is suitable for policy-
related issues or not (Gujarati, 2020). The model considered stable if it satisfies the stability
tests in the term of residuals and the squares.
75
H0. β2 ¼ 0 Data are nonstationary.
H1. β2 < 0 Data are stationary.
X
K X
K X
K
Log invt ¼ a1 þ a1i log invt−1 þ b1i log gdpt−1 þ d1i log IRt−1 þ ε1t (3)
i¼1 i¼1 i¼1
JBSED X
K X
K X
K
1,1 Log gdpt ¼ a2 þ a2i log invt−1 þ b2i log gdpt−1 þ d2i log IRt−1 þ ε2t (4)
i¼1 i¼1 i¼1
X
K X
K X
K
Log IRt ¼ a3 þ a3i log invt−1 þ b3i log gdpt−1 þ d3i log IRt−1 þ ε3t (5)
i¼1 i¼1 i¼1
76 where, aij, bij and dij are parameters to be estimated, the «’s are the stochastic error, often
called impulses or shock elements. The dependent variable is a function of its lagged
values and the lagged values of other variables in the model. E’s are the stochastic error
terms and called impulse or shock elements, and this helps to provide a clear distinction
between correlation and causality as the impulse response function. The researcher logs
the variables for direct estimation and interpretation of the coefficients as responsiveness
or elasticity.
5. Empirical results
5.1 Regression analysis 77
Table 1 shows the empirical results of the regression analysis. The dependent variable is
the domestic private investment (INV). The independent variables include GDP, IR and
POLINS as this variable was taken for regression analysis only. The result shows that the
regression is not spurious since the R-squared of 0.87 is less than the Durbin–Watson,
which is 1.07. The domestic private investment is negatively associated with the IR; when
the IR increases by 1%, the domestic investment decreased by 19.4%. This result is
consistent with neoclassical and Keynesian theories, and it is compatible with other
previous studies.
On the other hand, the domestic investment in this model is positively associated with
POLINS; when the POLINS increased by 1%, the domestic private investment increased by
40.99% (hence the political uncertainty is associated with the three attacked on the Gaza
Strip, which interprets that the more object is damaged, the more is the need of expenditure,
and so the more of domestic investment would take place. This result is consistent with the
economic theory, which emphasizes that the more the government expenditure, the more the
investment. The result implied that when there is an increase in GDP by 1%, the domestic
investment increases by 18.7%.
The goodness-of-fit of adjusted R-squared for the model is 87%, meaning that the
independent variables are likely to explain the dependent one by this percentage. This result
is fair enough to consider the model results in the analysis. Accordingly, The F-statistic is 0.0,
which implies that the F-statistic is statistically significant at a 1% level of significance.
F-statistic 1.797662 1
equation is 0.001387, the standard error is (0.00369), and the t-statistic is 0.37644. There is
no cointegration between variables which means there is no long-run equilibrium
relationship between them. VAR model is used for a short-run relationship to give us the
lags where the short equilibrium relation had existed. In the following model, two equilibrium
relations occurred; the first one is for INV (4) in the INV equation, the T-statistic is 3.22598,
which means that the optimal lag is four where the equilibrium has done. The second
equilibrium occurred at lag 1 for IR (1) in the IR equation. The value of t-statistic is
2.28952, which is above the t-statistic of 1.96. The results of D (INV) equation show that the
coefficients are negatively significant at lag four. The D(IR) equation shows that the
coefficient is also negatively significant at lag one.
The var analysis above Table 6 shows that the value of the fourth lag’s coefficient is
significant for the dependent variable domestic investment; the value of T-statistic is the
absolute value of 3.22598 in which is more than the t statistic 1.96. the value of the lending
rate’s coefficient is significant at the first lag where the T-statistic 2.28952 is more than the
critical value of the t-statistic; this means that they are influenced at this period. The negative
sign indicates a negative relationship between domestic investment and the lending rate of
the shekel in the short-run supporting theories of Keynes & neoclassical approach.
The adjusted coefficient of determination (R-squared 5 0.403543) in INV-equation
indicates that the explanatory variable of (IR) explains about 40% of the investment.
5.7 VAR and Granger causality
Table 7 table below shows the causality between the dependent variable domestic investment
and the independent variable lending rate. The null hypotheses Y cannot cause X; in the
shown model, the first table shows that IR (lag1, lag2, lag3 and lag 4) jointly cannot cause INV
because the p-value is 61.5%, which is bigger than 5%, so the null hypotheses cannot be
rejected, which means that IR cannot cause domestic investment. The second table shows
that the p-value is 78.5%, which is more than 5%, so the null hypothesis of INV is accepted
and cannot cause IR.
In Table 7 VAR Granger causality analysis is used to test whether the dependent variable
of domestic investment leads to lending rate or causes it, whether lending rate causes
domestic investment or not, the results accept the null hypotheses that there is no causality Private
for both variables, neither investment causes IR nor IR causes investment. domestic
investment in
5.8 Autocorrelation test Palestine
The LM test’s null hypothesis indicates that there is no serial correlation in the residuals up to
the specified order. The p-value is 26%, which is more than 5%. That means the null
hypothesis is accepted. The model has no serial correlation, which is a good result; there is no 81
delayed copy of the variable and itself as a function of delay; there is a similarity between
observations as a function of the time lag between them. However, the results accept the null
hypothesis, and there is no serial correlation in this model.
40 40
20 20
0 0
–20 –20
–40 –40
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
0.4 0.4
0.0 0.0
Figure 1.
–0.4 –0.4
The relationship
(impulse) between
investment and
–0.8 –0.8 interest rate
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
JBSED when standard deviation shock is given to IR in the residual and then the inv’s reaction. In
1,1 other words, when the IR has a positive shock, the investment becomes negative when it is
located below the x-axis as shown in Figure 1 below.
words, some countries that produce weapons may benefit due to conflicts, but this cannot be
considered as a good indicator of domestic private investment improvement. In contrast,
Palestine has a unique situation because domestic private investment mainly depends on the
spending of individuals, companies, government and donor countries on reconstruction.
The study uses sophisticated techniques based on time series analyses such as ARDL &
bound test, VAR tests, causality and forecast error and decomposition and impulse response.
These tests reveal that there is no integration between the study variables in the long-run.
Moreover, there is no causality between domestic investment and lending rate. It also
employed the ADF-test to avoid unit root problems that are usually related to time-series
data. On the other hand, the national currency is still not found in Palestine. Policies are
recommended to draw an appropriate ratio of the IR for the currencies-in-circulation for
boosting investment and economic development.
Based on the study results and conclusions, the researcher comes up with several policy
implications. Paying more attention to establishing fundraising parts to support domestic
investment funded by local investors and government, in addition to supporting local and
Palestinian investors to stimulate investment for improved economic development, this
policy can be applied in the short run.
A cost-benefit analysis concerning establishing a Palestinian national currency should be
taken into account by policymakers. Such a long-run policy is likely to allow decision-makers
to draw a reasonable IR that may reduce it to zero levels or a superficial level for stimulating
domestic private investment. In particular, lower IRs encourage additional investment
spending, giving the Palestinian economy a boost in slow economic growth.
JBSED The Palestinian National Authority is advised to adopt a policy of tackling the rate of
1,1 consumption level. This policy can play an essential role in encouraging the demand for
investment in small and medium enterprises and, therefore, GDP growth. Such an
expansionary policy will encourage private sectors of industry and agriculture.
Finally, achieving self-reliance instead of being a dependent economy is necessary to
make use of the policy implications stated above.
84 6.1 Further research
This study was highlighted several research gaps on which further research would be
beneficial to the Palestinian economy’s policymakers. Further research topics may focus on
the following:
(1) The impact of foreign aids and government spending on aggregate demand.
Empirical evidence from Palestine.
(2) The relationship between the Palestinian trade deficit and fluctuations of the
circulated currencies in Palestine: Time series analysis.
(3) The impact of COVID-19 pandemic on private domestic investment: Empirical
evidence from Palestine.
Declarations:
This is to confirm that,
(1) Data and materials used in this study are available with authors and upon your
request.
(2) The authors declare that they have no funding for this research.
(3) The content of this paper has not been published or submitted for publication
elsewhere. In addition, the three co-authors made a significant contribution and are in
agreement with the contents of this paper.
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Corresponding author
Ibrahim M. Awad can be contacted at: [email protected]
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