CENTRAL BANK POLICY RATE DIFFERENTIAL: THE IMPACT ON FOREIGN PORTFOLIO INVESTMENT AND FOREIGN DIRECT INVESTMENT

Abstract

This study empirically analyses the threshold levels of central bank policy rate differential concerning foreign portfolio investment and foreign direct investment for the Southern African Customs Union over the period 1990 to 2019. The fixed effect panel threshold described the threshold levels. The findings from the study show that the central bank policy rate differential has a linear relationship with either foreign portfolio investment or foreign direct investment. It is characterized by a threshold of 2.5000 concerning foreign portfolio investment while it stood at 10.1600 in terms of foreign direct investment. Central bank policy rate differential below the threshold of 2.5000 is found to be statistically significant but it decreases foreign portfolio investment while below the threshold of 10.1600, it increases foreign direct investment. However, in either case of foreign portfolio investment and foreign direct investment, broad money growth rate and inflation rate were found to be statistically insignificant in influencing both components of capital flows. The study concludes that the differentials in the policy rates promote foreign direct investment but decrease foreign portfolio investment.