Real Deposit Rate and Credit Supply Nexus in ECOWAS Evidence From DCCE-MG and PMG Techniques

Abstract This study interrogates the McKinnon-Shaw hypothesis that artificial depression of the real deposit interest rate depresses the supply of credit by banks. The sample coverage from 1980 to 2015 consists of ten members of the Economic Community of West African States made up of Communauté Financière d'Afrique (CFA) and non-CFA countries. This two groups have very different monetary structures. Engaging the dynamic common correlated effects-mean group (DCCE-MG) and pooled mean group (PMG) techniques, findings validate the hypothesis as the real deposit rate exhibits a positive and long-run impact on credit supply. Monotonic impact is not sustained. These outcomes are corroborated with robustness checks from the respective sub-samples though country-level results are mixed. Similarly, causality test shows that the real deposit rate Granger-causes credit supply in the long-run. Overall, the findings support the McKinnon-Shaw hypothesis that interest rate is an essential ingredient in the intermediation role of the financial system.