**2.1 Theoretical literature**

The effects of monetary policy variables on investment are based on the Keynesian theory of investment. The theory was developed by Keynes [24] who state that investment decisions are determined by a conducive environment for the investor and a long run survival behavior of an investor. For this to happen the investor need to consider the accumulation of capital which is influenced by lending rates [25–27]. The longer the investor survive in business, the more the economy can grow [26].

Keynes theory of investment further compares the marginal efficiency of capital (MEC) with interest rates [26, 28, 29]. If the MEC exceeds the rates, the investment will be increased. But because the production process demands the use of more and more capital, the MEC will suddenly fall. Once the MEC equals to the level of interest rate, there will not be any additional investments on income-earning assets. Additionally, Duesenberry [28] developed the financial theory of investment which assumes that there is a relationship between the cost of capital and interest rates.

The Keynesian theory of investment can be extended to include the effects of all the selected monetary variables on investment. For instance, according to Nucci and Pozzolo [30], investment is a function of the cost of capital and exchange rate. Also in Amiti and Weinstein [31] investment can be determined by money supply through bank supplies.

#### **2.2 Empirical literature**

It is vital to investigate the influence of monetary variables on investment activities as an investment is an important economic resource needed for economic growth. Literature suggests that monetary variables such as exchange rate do affect investment levels of a country in several setups. For instance, Osemene and Arotiba [32] advocate for a stable exchange rate environment to have positive effects of volatile exchange rate on foreign portfolio investment. Therefore, it can be argued that monetary authorities should formulate policies that result in a stable exchange rate as a way of boosting investors' confidence. These findings are enforced in Teddy [33] that a high volatile (highly unstable) exchange rate in Zambia harmed private capital inflows.

There are several conditions found in the literature on how the exchange rate can affect investment. These conditions vary depending on the developing state of the country. In Harchaoui, Harchaoui et al. [34], the exchange rate can influence investment through three channels: domestic and foreign demand, prices of variable inputs and the investment price. When a domestic currency depreciates, sales of goods and services yield higher revenues and profits. At the same time, the variable cost and imported capital increase to counterbalance the positive effects of higher revenues [34, 35]. This is because revenue from both domestic and foreign sales is increased. Nucci and Pozzolo [30] supported this argument when they investigated the exchange rate- investment nexus for some selected Italian manufacturing firms. The authors discovered that exchange rate depreciation impacts investment positively through revenue channel and negatively through the cost channel, and added that businesses need monopoly power to achieve this relationship.

The most important factors deliberated in the literature about what can cause positive effects of exchange rate on investment are stable exchange rate, monopoly power, the openness of trade, amount of imported inputs and developing level of a country [32, 34, 36, 37]. For instance, Atella et al. [36] emphasized that for a country's

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**3. Methodology**

*Effects of Some Monetary Variables on Fixed Investment in Selected Sub-Saharan African...*

investment level to benefit from the exchange rate, the exchange rate has to be stable. Therefore it can be argued stable exchange rate can benefit any economic system through investment and profits due to its ability to strength firm market power. Servén [37] found a negative relationship between real exchange rate and investment in a highly open and less developed country scenario. This enlightens reasons why African countries depreciation of exchange rate would reduce investments as they use a lot of imported inputs with high variable input price. This explains why a country can benefit from its investment under stable exchange rates with high market power. Money supply shocks can have differentiated effects on the real economy in several ways including investment. For example, Amiti and Weistein [31] found that money supply in bank loan can significantly determine investment activities, though there was a negative relationship. To identify the causal effect of money on the real economy, Brzezinski et al. [38] noted that reducing money supply can decrease real output. The study made use of local projections and autoregressive models to discover that clean identification requires that the money shock is not correlated with other shocks either contemporaneously, or across time. Karras and Stokes [39] also found a positive relationship in the money supply investment nexus and argued that investment is governed by asymmetries in money supply shocks

Many studies established a positive relationship between money supply shocks and investment activities [31, 40, 41]. It is noted that the use of the money supply channel more financial markets and works well to positively influence investments where there are developed financial institutions [40]. Chen et al. [42] indicated that an increase in the money supply would increase money demand. This implies that the money supply can be one of the predictors of investment activities [42]. However, Gertler and Grinos [43] have the opposite that reducing money supply

The relationship between lending rates (interest rates) and investment is widely

understood in the macroeconomic sphere because the interest rate is one of the prospective determinants of investment [44–48]. It has been established in the literature that high-interest rates stimulate savings but harm investment especially of small businesses [44, 49–51]. The reasons for these harmful effects are because high-interest rates increase capital cost, and thus discourage investment [44]. Another view from Malawi and Bader [44] is that in less developed financial institutions private investment is inhibited by savings. Those are the instances where

there is a positive relationship between the interest rate and investment.

rise in the real interest rate causes a reduction in private investment.

Li and Khurshid [45] used the vector error correction model to investigate the effects of interest rate on investment in a Chinese province named Jiangsu. The study observed that in Jiangsu, interest rate and investment are positively related only in the short-run and negatively related in the long-run. It should be noted that some scholars believe that interest rates and investment have a one-way relationship. Onwumere et al. [46] revealed that, for Nigeria, the interest rate had a negative significant impact on investment for the period 1976 to 1999. In support of these findings, Muhammad et al. [47] also found that investment has an inverse association with the real interest rate in Pakistan for the period 1964 to 2012. Hyder and Ahmed [48] investigated the reasons for the fall of private investment in Pakistan. Their study concluded that a

To analyze the effects of monetary variables on investment in the selected Sub-Saharan African countries (Kenya, Mozambique, Nigeria, South Africa and

*DOI: http://dx.doi.org/10.5772/intechopen.93656*

which are similar to the ones that affect output.

can enhance investment.

#### *Effects of Some Monetary Variables on Fixed Investment in Selected Sub-Saharan African... DOI: http://dx.doi.org/10.5772/intechopen.93656*

investment level to benefit from the exchange rate, the exchange rate has to be stable. Therefore it can be argued stable exchange rate can benefit any economic system through investment and profits due to its ability to strength firm market power. Servén [37] found a negative relationship between real exchange rate and investment in a highly open and less developed country scenario. This enlightens reasons why African countries depreciation of exchange rate would reduce investments as they use a lot of imported inputs with high variable input price. This explains why a country can benefit from its investment under stable exchange rates with high market power.

Money supply shocks can have differentiated effects on the real economy in several ways including investment. For example, Amiti and Weistein [31] found that money supply in bank loan can significantly determine investment activities, though there was a negative relationship. To identify the causal effect of money on the real economy, Brzezinski et al. [38] noted that reducing money supply can decrease real output. The study made use of local projections and autoregressive models to discover that clean identification requires that the money shock is not correlated with other shocks either contemporaneously, or across time. Karras and Stokes [39] also found a positive relationship in the money supply investment nexus and argued that investment is governed by asymmetries in money supply shocks which are similar to the ones that affect output.

Many studies established a positive relationship between money supply shocks and investment activities [31, 40, 41]. It is noted that the use of the money supply channel more financial markets and works well to positively influence investments where there are developed financial institutions [40]. Chen et al. [42] indicated that an increase in the money supply would increase money demand. This implies that the money supply can be one of the predictors of investment activities [42]. However, Gertler and Grinos [43] have the opposite that reducing money supply can enhance investment.

The relationship between lending rates (interest rates) and investment is widely understood in the macroeconomic sphere because the interest rate is one of the prospective determinants of investment [44–48]. It has been established in the literature that high-interest rates stimulate savings but harm investment especially of small businesses [44, 49–51]. The reasons for these harmful effects are because high-interest rates increase capital cost, and thus discourage investment [44]. Another view from Malawi and Bader [44] is that in less developed financial institutions private investment is inhibited by savings. Those are the instances where there is a positive relationship between the interest rate and investment.

Li and Khurshid [45] used the vector error correction model to investigate the effects of interest rate on investment in a Chinese province named Jiangsu. The study observed that in Jiangsu, interest rate and investment are positively related only in the short-run and negatively related in the long-run. It should be noted that some scholars believe that interest rates and investment have a one-way relationship. Onwumere et al. [46] revealed that, for Nigeria, the interest rate had a negative significant impact on investment for the period 1976 to 1999. In support of these findings, Muhammad et al. [47] also found that investment has an inverse association with the real interest rate in Pakistan for the period 1964 to 2012. Hyder and Ahmed [48] investigated the reasons for the fall of private investment in Pakistan. Their study concluded that a rise in the real interest rate causes a reduction in private investment.
