i Vol. 13(2), pp. 100-105, April-June 2021 DOI: 10.5897/JEIF2021.1127 Article Number: 9D4039867119 ISSN 2006-9812 Copyright©2021 Author(s) retain the copyright of this article http://www.academicjournals.org/JEIF Journal of Economics and International Finance Full Length Research Paper The effects of interest rate on economic growth: Further insights from the Gambia Matarr Njie* and Momodou Badjie Department of Economics and Finance, School of Business and Public Administration, University of the Gambia, Gambia. Received 26 April, 2021; Accepted 8 June, 2021 The main objective of this paper is to examine the effects of interest rate on economic growth in Gambia over the period 1993 to 2017. The Vector E rror Correction Model (VECM) is used to check the relationships between the dependent variable (Gross Domestic Product) and independent variables (Real Effective Exchange Rate and Real Interest Rate), both in the short-run and long-run. Post estimation tests, including Lagrange Multiplier test for residual autocorrelation were also conducted for autocorrelation, as well as Jarque Bera to test for stability and to check whether residuals are normally distributed. The empirical evidence indicates that there is no short-run association between the growth of the Gambian economy and interest rate but that there is a long run connection that runs from real interest rate and real exchange rate to GDP. Based on these findings, the paper recommends for the government through the Ministry of Finance and Economic Affairs to prudently manage the Gambia’s budget by avoiding unnecessary expenditures that could lead to budget deficits.These budget deficits are key drivers that cause interest rates to rise, which in turn are inimical to economic growth. Key words: Gross domestic product, real interest rate, real exchange rate, Vector Error Correction Model (VECM). INTRODUCTION The debate over the precise effects of interest rate on economic growth remains an unfinished business. Existing research shows vast variations in the use of interest rate as a policy tool for reviving economic growth. On the one hand, research has shown that decreasing the interest rate due to expansionary monetary policy may revive the economy because of increased economic activities (Jelilov, 2016), thereby creating a positive and statistically significant impact on economic growth (Campos, 2012). On the other hand, slow economic growth which may be due to a tight monetary policy via a relatively high interest rate regime can lead to a fall in the economic growth (Foo, 2009), which may be due to the negative and statistically significant impact of interest rate (Udoka, 2012). Yet, others, including Hansen and Seshadri (2014) found no significant relationship between interest rate and economic growth. For the strand of the literature that adheres to the view that reducing interest rate may help increase aggregate demand, critics contend that such a policy move is of *Corresponding author. E-mail: manjie@utg.edu.gm, njagga25@yahoo.com. Author(s) agree that this article remain permanently open access under the terms of the Creative Commons Attribution License 4.0 International License