THE IMPACT OF INTEREST RATE ON ECONOMIC ACTIVITIES? A SYSTEMATIC REVIEW
Keywords:
Systematic review,, PRISMA,, Interest rate,, Macroeconomic VariablesAbstract
Purpose: The interest rate is one of the most important macroeconomic variables in all conventional schools of economic thought. On the other hand, it is prohibited under Islamic economic principles. Through this study, we aim to evaluate the findings of existing economic literature to determine whether interest rates have a positive or negative impact on key macroeconomic variables, namely output, employment, and inflation.
Methodology/approach/design: The study adheres to PRISMA (preferred reporting items for systematic reviews and meta-analysis) guidelines to review a total of 155 full-text articles which were retrieved from Scopus database aggregator. The articles are classified into four sub-topics- the individual effects of interest rate on inflation, output, and employment and also the joint effect of interest rate on these key macroeconomic variables. The Journal rankings of ABDC (Australian Business dean’s council) are harnessed to ensure credibility and quality in the systematic review. And the existing literature retrieved is synthesized through qualitative synthesis method.
Findings: The overwhelming majority, 19 out of 26 studies, found a significant negative impact of interest
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Hamza, S.M., Ali, S.A., and Jawaid, T.
rate on output; indicating higher interest rate retarded economic activities. The results of 16 out of 39 studies show Interest rate significantly increases inflation.
Limitations/implications of Research: The study concedes and mentions the potential biases including citation bias, language bias, and temporal bias owing to the adherence of strict exclusion criterion. The study findings are based on only Scopus listed journals.
Originality value: This study is unique as it applied PRISMA protocol to identify the effect of interest rate on key macroeconomic variables. It is a pioneer study which consolidate the existing literature related to interest rate and its impact on output, employment and inflation.
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