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BBVA Podcast. Customer service via social networks. However, given the religious factor of dislike toward income from interest, we expect that the interest rate will have an insignificant effect on saving in Islamic countries.
There is a possibility of endogeneity in regression models. Endogeneity can arise because of i a bidirectional relationship between the dependent and independent variables also called reverse causality , ii measurement error, iii omitted variables, or iv the existence of a correlation between a variable of the model and the error term.
Growth models have variables that can determine endogeneity. We use this equation to model saving and investment in Islamic and non-Islamic countries. Country effects and time effects may also reflect country-specific and period-specific components, respectively, of the measurement error v it.
The correlation matrices showing the correlations among the independent variables of the Islamic and non-Islamic countries appear in Table 4. The regression results of the random effect and system GMM models are shown in Table 5. Table 6 summarizes the results of all the models. This study confirms that although the interest rate is an important determinant factor of saving and investment, as believed by many researchers, religious factors also play a vital role.
The latter can affect the behavior of an investor regarding his decision to save and his response toward incentives being offered i. This can be one of the reasons for the failure of economic policy, leading to financial crises, in most Muslim countries. Our results for relationship between interest rate and saving are similar to those of Nasir and Khalid in the case of Islamic countries and Athukorala in the case of non-Islamic countries. Instead of giving importance to the interest rate in their economic policies, Muslim countries should try to increase per capita income, reduce remittances received and national expenditure, and improve employment conditions in their countries to increase saving.
They should also attempt to lower the lending interest rate and inflation, and increase trade and remittances received to increase investment. Thus, Muslim countries can increase investment and saving, and achieve positive economic growth. On the other hand, the governments of non-Muslim countries should continue to pay heed to the interest rate while devising their economic policies. They should attempt increasing per capita income, inflation but keep in check to maintain a healthy level of inflation , and the interest rate but lower national expenditure in order to increase saving.
With regard to improving investment, the governments of non-Muslim countries should try to decrease inflation, domestic credit offered by banks, and the interest rate, while attempting to increase trade in order to increase investment.
Nasir and Khalid point out that saving and investment are the tools for economic growth. Thus, our results suggest the need for harmonizing economic policies accordingly.
Doing so would increase savings in Islamic countries. This study presents a new concept in economic study, namely, the impact of religious beliefs on country-level economic variables. This concept can be expanded to include countries, new variables and timeframes, and novel statistical techniques e. However, the unavailability of data, especially for certain Muslim countries, can pose a significant limitation.
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Brian O'Connell Contributor. Benjamin Curry Editor. When rates go down, the opposite is true, and your money may go a bit further. But Poorman suggests being careful about overextending yourself financially even when rates are low. While lower rates feel better to most people—no one likes paying more than they have to—rate increases and decreases are neither good or bad.
The Fed raises rates when the economy is doing well to help prevent it from growing too fast and causing high inflation. The Fed lowers rates to help the economy continue growing. November economic outlook: Is inflation here to stay? How does the stock market work? Should you give money to your kids or save for retirement? Asset allocation and diversification does not ensure a profit or protect against a loss.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
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