Effect of macroeconomic factors on industrial output in Rwanda (2006-2018)

Abstract

The purpose of this study was to determine the effect of macroeconomic factors on industrial output and the study mainly sought to determine the effect of the exchange rate, inflation rate, and interest rate on industrial output using time series quarterly data for the period 2006 to 2018 obtained from the National Institute Statistic of Rwanda (NISR) publications and International Monetary fund (IMF) databases. This study utilized an Autoregressive Distributed Lag (ARDL) approach and Error Correction Model (ECM) to determine the effect of the exchange rate, interest rate, and inflation rate on industrial output in the long and short run, Gross Domestic Product and foreign trade (export and import) were added as control variables. The long-run estimates indicated that the exchange rate, interest rate, and inflation rate had a negative and significant effect on industrial output at 1% level of significance. The results further showed that 1% increases in the exchange rate, interest rate, and inflation rate would lead to a 0.65%, 0.087%, and 0.007% decrease in industrial output respectively. On the other hand, the short-run results revealed that the exchange rate and interest rate had a positive and significant effect on industrial output at a 1% level of significance and also the results showed that the short-run effect of inflation rate on industrial output is negative and significant at 1% level but returned positive at one and second lag. In addition, the Error Correction coefficient indicated that the system would correct its previous period disequilibrium at a speed of 43.3% quarterly to reach the steady-state. Based on empirical findings the exchange rate, interest rate, and inflation rate have an influence on industrial production. Therefore, the Government and other partners should step up efforts to fight against instability in the macroeconomic environment of Rwanda in order to achieve industrial output growth and development.