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AN EMPIRICAL STUDY OF THE RELATIONSHIP BETWEEN INTEREST RATE AND INVESTMENT IN NIGERIA (1980-2013)
Abstract
This study was undertaken to analyze interest rate and equally evaluate its basic impact on the
Nigeria’s economy. Specifically, it determined the extent interest rate impacts on the investment in Nigeria. The study used existing data to predict future outcomes. Ex-post facto research design was used because inherences about relations among variables are made, without direct intervention, from commitment variables of independent and dependent variables. The results of cointegration shown revealed that the variables are cointegrated. This implies that there is long run relationship between interest rate and investment in Nigeria within the period under review. It is estimated from the VECM equation at the upper chamber that 1% increase in INT, will result to decrease by 0.2% in investment (LINV). The sign borne by the coefficient estimate of interest rate met the apriori expectation. It is an indication that increase in the cost of borrowing, on the average, will discourage investment in Nigeria. Also, 1% increase in savings (LSAV), will result to decrease by 1.2% in investment (LINV). In the light of the findings, it was recommended that the relevant authority should embark on a policy that will reduce interest rate as will stimulate investment and increate output. Proper implementation and co-ordination of policy objective should be rigorously pursed implementation of policy is usually multidimensional and hence calls for effective co-ordination among the various government department, banks and other relevant sectors. Government should improve the country’s infrastructural facilities like power and access roads. They should be improved upon to create an enabling environment for investment to strive. Also, government should work with the informal financial sector by granting interest-free loans for investment purposes. These efforts would help to boost investment in Nigeria.
Keywords: Interest rate, investment, Nigeria, Cointegration,