Still On The Influence of Interest Rate On Nigerian Economy (1986 - 2018)
Still On The Influence of Interest Rate On Nigerian Economy (1986 - 2018)
Still On The Influence of Interest Rate On Nigerian Economy (1986 - 2018)
ISSN No:-2456-2165
Where: Β = the short run coefficients; µ = the white-noise error term; α = the long run coefficients; ∆ = the first difference operator;
t = denoted time period; Akaike Info criterion (AIC) is the basis of chosen the highest number of lags in the model.
Descriptive Statistics
In order to give a brief overview of the time series data, level of instability in the economy, while FD has the lowest
the descriptive statistics for the dependent and independent mean of 11%. The value of Kurtosis is use to determine the
variables were presented in table 1. The explained variable is peakedness of the series and usually considered at a value
economic growth (RGDP) measured by the value of real gross below or above three, when it is below three, it said to be
domestic product, while the explanatory variables are: money flat/platykurtic and when above three it is considered
supply (M2), inflation rate (INF), interest rate (INT), savings leptokurtic to the normal distribution. From table 4.1 below
rate (SVR), exchange rate (EXR) and financial deepening RGDP, SVR and FD are less than three and as such are flat or
measured by credit to private sector as a measure of GDP platykurtic while M2, INF, INT and EXR are more than three
(FD). The descriptive statistics presents the mean, standard therefore is peaked or leptokurtic.
deviation, minimum, maximum and kurtosis value. The
statistics show that GDP has the highest mean value of 33,725 Unit Root Test Result
in billions of naira and the highest volatility which shows the
The Null hypothesis of no cointegration among the variables was rejected because the F statistic value of 5.76 is greater than
upper bound critical value as shown in table 3. The optimal lag length selected using the Akaike Info criterion (AIC) is ARDL (3, 3,
3, 2, 3, 3, 0). The results of the model selected are presented in Table 4 and 5 for long and short run respectively.
From the result presented in Table 4, the long run coefficients showed that the major determinants of economic growth from
the selected independent variables are interest rate, broad money supply, exchange rate, inflation rate and financial deepening in the
long run. Increase in broad money supply (M2) causes an upward trend in GDP. The result also shows that the coefficient of interest
rate (INT) is positively and significantly related to the economy (GDP). This implies that increase in the lending interest rate
seemingly causes an upward movement in the GDP in the long run. On the other hand, the savings interest rate (SVR) coefficient is
negatively signed, which implies that SVR causes a downward swing in the economy in the long run. This is contrary to economic
theory. However, this could be due to some factors such as weak banking system, economic instability and political instability in
terms of relative frequent changes in government policies among others (Ajayi et al, 2017). This is more evident from the
coefficient of both inflation rate (INF) and exchange rate (EXR) which have negative effects on the economy. Surprisingly,
financial deepening (FD) has significant negative effect on the economy in the long run. This could also be traced to the
underdeveloped financial system in the country as significant numbers of people remain unbanked.
The short run coefficients showed the major contributing GDP. Expectedly, INF has an adverse effect on the GDP. In
factors to economic growth in the short run are lagged value of the same vein, the current, one lagged and two lagged value of
GDP, lagged value of M2, current value of INF, lagged value EXR have negative effect on GDP. On the other hand, the
of SVR, current and lagged EXR and current FD as showed in current, one lagged and two lagged value of SVR have
Table 5. positive effect on the GDP. While FD exhibits a negative
effect on GDP.
One lagged value of GDP is surprisingly negatively
related with current GDP. While the two lagged value of GDP Furthermore, the Error Correction term coefficient is
has positive effect on the current GDP. The current value and significant and shows that the variable adjust by 3.2338 per
one lagged value of M2 have negative effect on GDP. On the cent towards the equilibrium level in the long run whenever it
other hand, two lagged value of M2 has positive effect on drifted from it in the short run.
Generally, the ARDL regression model fits well as it passed the entire estimation test conducted and reported in Table 6.
The result of the granger causality test from table 4.6 significant in the long run as businesses and consumers adjust
reveal unidirectional causality from GDP to M2, weak to the implemented changes in interest rate. The result also
unidirectional causation running from GDP to INT, SVR to suggests that the liberalization of the interest rate in 1986 has
GDP, and weak bidirectional causation between EXR and not only reflect the true competitive state of the interest rate
GDP. Also a unidirectional causation running from GDP to but has also contributed to the growth of the economy
FD, INF to INT, SVR to INT, and a bidirectional causation positively. The findings is in line with the McKinnon and
between SVR and INF. However, there is no causation Shaw hypothesis and the studies of Obamuyi (2009) Ajayi et
between INT and FD. al (2017), and Heba (2017). However, it contradicts Chris and
Anyingang (2012), Bhunia (2016), and Harswari and Hamza
VII. DISCUSSION AND CONCLUSION (2017).
This paper investigates the influence of interest rate on The broad money supply (M2) exhibits an adverse effect
Nigerian economy for the period 1986 to 2018. utilizing the on the economy in the short run and a positive effect in the
ARDL approach, both short and long run relationships long run. Increase in money supply has been associated with
between economic growth and the selected explanatory inflationary trend as too much money will be chasing few
variables which are broad money supply (M2), inflation rate goods. This causes imbalance in the economy in the short run.
(INF), interest rate (INT), savings rate (SVR), exchange rate However, the effect turns out positive in the long run as firms
(EXR) and financial deepening (FD) were analyzed. increase their productive capacity to accommodate the
increase in demand, as the result suggests.
The findings of the study suggest that lending interest
rate and savings rate generally have positive effect on Inflation rate (INF) has adverse effect on the economy
economic growth both in the short and long run which both in the short and long run. This only supports the level of
conforms to economic theory. Although, the effect of lending instability in the economy, and the inability of the monetary
interest rate on the economy is insignificant in the short run. authorities to provide balance in the economy. This is
This may be due to the response lag effect, which may cause supported by the effect of the exchange rate (EXR) on the
delay in bringing the desired changes in the economy economy which is negative also both in the short and long run.
(Stawska & Miszcynska, 2017). However, the effect is