MONETARY POLICY AND COST OF CAPITAL IN SUB-SAHARAN AFRICA. AN EMPIRICAL ANALYSIS
Kagarura Willy Rwamparagi, Nahabwe Patrick Kagambo John
Kabale University, Kabale, Uganda
Abstract
The effects of monetary policy on cost of capital in Sub-Saharan Africa from 2000 to 2021 is examined using a quantitative research design and structural equation modeling (SEM). The research analyzes complex relationships among key economic variables with balanced panel secondary World Bank data. The conceptual framework incorporates cost of capital as dependent variable and; real exchange rate, inflation rates, and broad money, as independent variables. Mediating variables; financial flows and investment, along with moderating variables; foreign direct investment, and trade openness, are examined to explore monetary policy impacts on cost of capital. Empirical analysis involves regression, mediation, moderation analyses, and robustness checks to validate the significance of these relationships. Error correction techniques reveal statistically significant relationships among the variables. The results show 0.89753 adjusted R- with 2.61603 Durbin-Watson statistic, indicating robustness of the model. Key findings highlight that broad money, inflation rate, investment, along with foreign direct investment positively and significantly impact cost of capital. Specifically, a 10% increase in these factors results in a 7.23, 1.49, 2.18, and 0.38 percent increase in the cost of capital, respectively. While trade openness, financial flows and real exchange rate had a negative and statistically significant relationship with cost of capital. A 10% increase in these factors results in a 6.49, 0.13, and 0.21 percent decrease in the capital cost, respectively. Additionally, the simultaneous interaction of broad money and investment is both positive and statistically significant, with a 10% increase in the pair leading to a 2.03% increase in the cost of capital, and is supported by 0.573342 adjusted R-squared and 2.249774 Durbin-Watson statistic. Study recommends that policymakers should focus on several key areas such as managing inflation, broad money, investment, and foreign direct investment. Governments should create an investor-friendly environment through stable regulatory frameworks, infrastructure development, and incentives for foreign direct investment. Additionally, fostering trade openness, exchange rate stability and enhanced financial flows will reduce on the cost of capital.
Keywords: Monetary policy, Cost of Capital, Sub-Saharan Africa
Journal Name :
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EPRA International Journal of Economic Growth and Environmental Issues (EGEI)
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Published on : 2025-01-26
Vol | : | 13 |
Issue | : | 1 |
Month | : | January |
Year | : | 2025 |