Rise of inflation and formation of interest rate on loans in industrial sector: A VECM approach to assess the impact on total industrial production from evidence of Bangladesh.

Industrial development is the prerequisite for sustainable economic growth. This study has examined the impact of the interest rate imposed on advances in the small and medium enterprise (SME) industrial sector, the large industrial (LI) sector, and inflation on the total industrial development of Bangladesh. For this purpose, we have used monthly data from January 2015 to June 2021. The weighted average interest rate of advances (WAIRA) is used as a substitute for the interest rate imposed on advances that were sourced from Bangladesh Bank (BB). We have applied Johansen co integration and the VECM technique to investigate long- and short run relationships, and the results have revealed the existence of both. We have observed that, in the short run, only WAIRA on SME industries has a significant negative impact on total industrial development. In the long run, inflation and WAIRA on SME and large industry have a significant impact on industrial development. The long run relationships have indicated that, inflation and WAIRA in the SME sector have a negative influence on total industrial development, but WAIRA in the large industry (LI) sector has a positive influence. Finally, considering the entire situation of the economy of Bangladesh, especially the growing industrial sector, these findings are highly momentous for policy implications and achieving sustainable development in this sector.