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Still On The Influence of Interest Rate On Nigerian Economy (1986 - 2018)

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Still on the Influence of Interest Rate on Nigerian


Economy (1986 – 2018)
Sulaiman, Luqman Adedamola1, Idris, Babatunde Kazeem2
Department of Finance, Faculty of Management Sciences, Integrated Data Service Limited
Ekiti State University, EKSU : Benin, Nigeria
Ado-Ekiti, Nigeria.

Badru, Taiwo Bolanle3


Department of Accounting, Faculty of Management Sciences
Ekiti State University, EKSU
Ado-Ekiti, Nigeria.

Abstract:- Interest rate has been at the center of every I. INTRODUCTION


monetary policies around the world, as it is vital in
stimulating and changing the state of the economy. This For centuries now, the main target of every country
study examines the effect of interest rate on the growth of around the world has been growth and development which
Nigerian economy for the period 1986 to 2018. It utilizes should be a reflection of the state of the economy (Abebiyi,
the ARDL bound testing method to find the connection 2002 as cited in Maiga, 2017). However, the problem is not
between economic growth measured by GDP and with the target but with the means through which the target
independent variables (lending interest rate (INT), can be achieved without creating further imbalances. Several
savings rate (SVR), inflation rate (INF), broad money theories have been propounded to provide countries with
supply (M2), financial deepening (FD) and exchange rate models on how sustainable growth and development can be
(EXR). The findings establish a long run relationship attained while also explaining the causes and effects of certain
between rate of interest and the growth of the economy. phenomenon. There is a general consensus that capital
The short run analysis shows that one lagged value of formation is key to unlocking the desire for growth and
GDP is negatively related with current GDP. While two development potentials in any economy (Adeleye, 2018). Also
lagged value of GDP has positive effect on the current the availability of financial resources is an important
GDP. The current value and one lagged value of M2 have requirement of economic growth as it either allows or hinders
negative effect on GDP. While two lagged value of M2 has the critical sectors of the economy to pursue their growth-
positive effect on GDP. INF, FD and the current one oriented activities. The financial system exists to provide the
lagged and two lagged value of EXR have negative effect platform for capital formation as it attracts financial resources
on GDP. On the other hand, the current, one lagged and from where it is temporarily not needed and channels it to
two lagged value of SVR have positive effect on the GDP. where it is needed. Hence, the financial system performs the
The granger causality test revealed a unidirectional role of a catalyst for capital formation. It is noteworthy that the
causality from GDP to M2, weak unidirectional causation performance of this role has both cost, benefits and other
running from GDP to INT, SVR to GDP, and weak implications to the deficit and the surplus units respectively.
bidirectional causation between EXR and GDP. Also a The cost and benefit depending on the perspective from where
unidirectional causation running from GDP to FD, INF to it is viewed, is often referred to as interest rate.
INT, SVR to INT, and a bidirectional causation between
SVR and INF. There is no causation between INT and There are divergent views on the meaning of interest
FD. The findings of this study reveals that rate of interest rate. Modern economists explain interest rate in terms of
has a positive effect on the growth of the economy. Based “money”, “saving”, “productivity”, and “liquidity preference”.
on the findings, the study recommends that monetary It is simultaneously the reward for the supply of money, of
authority need to be more proactive rather than being saving, the pure yield of capital, and for forgoing of liquidity
proactive most times. (Jhingan, 1999). From this definition, interest rate can be
viewed as an important determinant of demand and supply of
Keywords:- Interest Rate, Economic Growth, Gross money as it plays the role of an equilibrating force between
Domestic Product, ARDL, Nigeria. the demand and supply of loanable funds (Anthony, 2017).
Interest rate has been at the center of every monetary policies
around the world, as it is vital in stimulating and changing the
state of the economy (Mushtaq & Siddiqui, 2016; Lee &
Werner, 2018). Every investment and savings decision of all
economic agents relies heavily on the state of the interest rate
(Anaripour, 2011). Therefore, interest rate should be a major
economic growth determinant through its effects on

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
investments and savings which are prerequisites in achieving Empirical studies exist on the effect of interest rate on
economic growth (Stawska & Miszcynska, 2017). economic growth both in developed and developing countries.
However, a general consensus remains elusive till date as
The McKinnon (1973) and Shaw (1973) framework existing studies have documented varying results from
provides theoretical support for a market determined interest different economies (Twinoburyo & Odhiambo, 2018). For
rate, and strongly rejects financial repression, which according example, using Johansen Cointegration, Akinwale (2018)
to the framework, fails to show the true competitive state of found a negative connection between rate of interest and the
the interest rate. According to the hypothesis, interest rate growth of the economy, while Okoye, Nwakoby and Modebe
determined by the “invisible hand” attracts and allocates (2015) using VECM obtained a positive relationship between
financial resources more efficiently in the economy, as the interest rate and output growth in Nigeria. Lee and Werner
competitive interest rate is likely to increase the level of (2018) also found that interest rate positively follows GDP
savings which is crucial for capital formation needed for growth in industrialized countries. Contrary to the result of
growth-inducing investments in the economy. Succinctly, Lee and Werner (2018), Barry (2014) reported a weak
liberalized interest rates positively affect economic growth as relationship between rate of interest and the growth of the
against artificial ceilings of interest rate (Odhiambo, 2009). economy. It is therefore obvious that there is need for further
Critics of the hypothesis suggest that financial liberalization empirical investigations on this topic as earlier suggested by
leads to higher level of interest rate, which consequently Aspinall, Jones, McNeill, Werner and Zalk (2015), among
attracts more savings but it adversely affect the borrowing others in their various studies.
capacity of some sectors that are yet to be developed, and
therefore weakens investment in some crucial sectors of the In addition, through financial deepening, it has been
economy. posited that financial system can enhance it contributions and
put the economy on the path of sustainable growth and
Financial theory suggests that a lower lending / interest development. One of the key variables to financial deepening
rate attracts more investment, which then boosts economic as suggested by Odhiambo (2009) is interest rate which can be
growth (Woodford, 2003; Baum, 2009). While a higher used to attract the unbanked populace in the economy. He
lending / interest rate discourages investment, which is argued that interest rate does not affect the economy directly
harmful to output growth. Similarly, a high lending / interest but rather through its transmissions on financial deepening.
rate encourages the surplus units to supply more funds, while a Hence, this study intends to examine the relationship between
lower one discourages them. Monetary authority faces a interest rate and financial deepening, interest rate and
dilemma in setting the appropriate interest rate which would economic growth and the causality between lending rate,
not only encourage savings but attracts more investments as savings rate and economic growth in Nigeria as such studies
well. Therefore, every monetary authority from both are relatively scarce in developing countries especially in
developed and developing economies are being confronted Nigeria. This study is also justified on the premise that if
with how to find an optimum interest rate policy, which is not monetary authority can identify the variable that causes the
only capable of attracting investments both locally and behavior of other variables, formulating an effective and
internationally but as well sustain output growth. efficient monetary policy for a sustainable growth would be
relatively easy. The remaining part of the paper is divided as
Developing economies like Nigeria has taken on several follows: sections two and three are for review of literature and
reforms over the years in order to find an optimum mechanism methods of analysis, section four is results and discussion and
through which an optimum interest rate can be achieved, as section five concludes the paper and make some
the country still lacks the optimal level of savings and recommendations.
investments needed for sustainable growth and development
(Eze, 2010 as cited in Jelilov, 2016). Despite the fact that the II. LITERATURE REVIEW
country remains one of the largest economy in Africa, the
level of infrastructures does not reflect this status as Using a panel data set of 22 countries, Anaripour (2011)
infrastructures continue to linger in deplorable state. One of carried out an empirical study on the causality between
the major reforms in the country has been the Structural economic growth and rate of interest by employing Granger
Adjustment Programme (SAP) introduced in 1986 which causality test. Result indicated that a negative and unilateral
ushered in financial liberalization which opened the door for a relationship exist between economic growth and interest rate
market-determined interest rate and credit allocation which running from economic growth to interest rate. In the same
was intended to enhance efficiency in the financial system and vein, Bhunia (2016) study on the relationship between
contribute to the rapid economic development. Since the inflation, economic growth and interest rates found a long run
introduction of SAP, the economy has witnessed several negative and unilateral causal relationship from economic
swings in the interest rate as the CBN continues to struggle to growth to interest rate in India.
find an optimum level of interest rate. While the small and
medium scale enterprises remains undernourished due to the Utile, Okwori and Ikpambese (2018) proxy economic
paucity of funds which is a result of an inefficient financial growth by GDP and reported a negative but insignificant
system. effect of interest rate on economic growth. Similar result was
also documented in the study of Etale and Ayunku (2016),
who employed ECM to analyze the association between
interest rate and the growth of the economy over the period

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
1980-2016. However, a study by Heba (2017) using 15 through savings and investments in South African
countries provided a support for the McKinnon and Shaw Development Community (SADC) countries.
hypothesis. The findings of the study showed that real interest
rate is positively associated with economic growth. That is, It is obvious from the above review that there is no
improvement in interest rate leads to more efficiency in capital consensus among the researchers as to the relationship
formation, which then encourages investments. between interest rate, financial deepening and economic
growth. Therefore, a further study of this nature is required to
Ajayi, Oladipo, Ajayi and Nwanji (2017) also found out fill this gap.
that a unilateral causal relationship running from savings
interest rate to GDP exists. And suggest that insecurity, III. RESEARCH METHODS
regional socio-political unrest and political instability in
general apart from interest rate are some of the factors Time series yearly data between 1986 and 2018 were
restricting economic growth. In line with the results of Ajayi collected using both Federal bureau of statistics and CBN
et al (2017) is Obamuyi (2009) who found out a positive statistical bulletin in other to achieve the primary aim of
relationship between deposit interest rate and GDP growth. In investigating the influence of interest rate on the growth
addition, the result indicated that financial deepening has an economy.
adverse relationship with economic growth due to the
weaknesses in the financial system. This is contrary to the IV. MODEL SPECIFICATION
study of Odhiambo (2009), who found out that financial
deepening granger causes economic growth in Zambia. The model adopted for this study is in line with the
McKinnon and Shaw hypothesis, which argued that interest
In a study on Asian countries, Harswari and Hamza rate liberalization positively affect economic growth. The
(2017) used a panel data of 20 countries within the period adopted model is expressed as follows:
2006 – 2015. The correlation and regression analysis
employed revealed that interest rate negatively and 𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1 𝐼𝑁𝑇𝑡 + 𝛽2 𝑆𝑉𝑅𝑡 + 𝛽3 𝐹𝐷𝑡 +
significantly influence economic growth. However, Saymeh 𝛽4 𝑀2𝑡 + 𝛽5 𝐼𝑁𝐹𝑡 + 𝛽6 𝐸𝑋𝑅𝑡 + µ𝑡
and Orabi (2013) in a study in Jordan on the relationship
………………………………………. (1)
between economic growth, inflation rate and interest rate
showed that interest rate has positive effect on economic
Where;
growth. Similarly, a study in Zambia by Odhiambo (2009) on
β0 = intercept
interest rate liberalization and economic growth using
β1 – β6 = parameters
cointegration-based error correction model found out that
µt = error term
interest rate liberalization indirectly affect economic growth
GDP = gross domestic product
positively through financial deepening.
INT = lending interest rate
SVR = savings/deposit interest rate
Udoka and Anyingang (2012) employed the multiple
FD = financial deepening measured by CPS/GDP
regression analysis to identify the impact of interest rate
M2 = Money supply
movement on economic growth for the periods 1970 to 2010
INF = Inflation rate
in Nigeria. The findings pointed to an inverse relationship
EXR = Exchange rate
between interest rate and economic growth. Contrarily,
Osadume (2018) reported a positive and significant effect of
V. ESTIMATION TECHNIQUES
interest rate on economic development. The study however
proxy economic development by human development index.
Unit Root Tests
Alhassan (2017), covering the period 1981 to 2014 and using
The study test for the stationarity of the variables using
ARDL to analyze the impact of interest rate liberalization on
the Augmented Dickey Fuller (ADF) unit root test to check
economic growth found that interest rate had a negative effect
the order of integration of variables and to avoid spurious
on the growth of the Nigerian economy. The result suggests
results after performing diagnostic test such as serial
that the liberalization of interest rate has led to high lending
correlation, heteroscedasticity and normality.
rate which has inflated the cost of capital. Thereby, hindering
productive investments and encouraging capital flight.
ARDL Cointegration Approach
Perhaps, developing economies are not yet ripe for
The study employed the Autoregressive Distributed Lag
liberalization of interest rate as empirical evidences from
(ARDL) cointegration approach because of its superiority over
developing economies have suggested. This can be traced to
other methods of estimation. It could be used on variables with
the “structural weaknesses” and “underdeveloped financial
different order of integration that is, I(0) or I(0).
markets” which are yet to be effectively integrated into the
global markets. This is echoed in the study of Lee and Werner
(2018) who found out a positive relationship between interest
rate and economic growth in industrialized countries as
monetary policies tend to be effective in such countries.
However, Moyo and Le Roux (2018) documented a positive
relationship between interest rate and economic growth

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
The ARDL bound testing procedure employs the following equation;
n n n n n n

𝐿𝐺𝐷𝑃𝑡 = 𝛽0 + ∑ 𝛽1 ∆ L GDPt−1 + ∑ 𝛽2 ∆ L INTt−1 + ∑ 𝛽3 ∆ L SVR t−1 + ∑ 𝛽4 ∆ L 𝐹𝐷t−1 + ∑ 𝛽5 ∆ 𝐿𝑀𝑆𝑡−1 + ∑ 𝛽6 ∆ 𝐿𝐼𝑁𝐹𝑡−1


i=0 i=0 i=0 i=0 i=0 i=0
n

+ ∑ 𝛽7 ∆ 𝐿𝐸𝑋𝑅𝑡−1 + α1 LGDPt−1 + α2 LINTt−1 + α3 LSVR t−1 + α4 LFDt−1 + α5 LMSt−1 + α6 LINFt−1


i=0
+ α7 LEXR t−1 + µ𝑡 (2)

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.

VI. RESULTS AND DISCUSSION

Descriptive Statistics

Table 1. Descriptive Statistics for Variables


Variables Mean Std. Dev. Min. Max. Kurtosis
RGDP 33725.22 19578.10 13779.26 69810.02 1.996529
M2 5153.530 7536.395 14.47117 25079.72 3.431348
INF 20.10105 18.22136 0.220000 76.76000 4.716528
INT 17.57661 4.628233 7.750000 29.80000 3.668152
SVR 7.350403 5.050325 1.410541 18.80000 2.273558
EXR 90.13014 90.31565 0.610000 306.1875 3.133873
FD 11.05262 5.377672 5.917270 20.77330 1.962942
Source: Author’s Computation (2021) via EVIEW 9 Package

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

Table 2: Augmented-Dickey-Fuller (ADF) Test


Null Hypothesis: Variable has a Unit root
Variables Augmented Dickey-Fuller test statistic Order of Integration
Level First Difference
RGDP -0.704467 -3.114373** 1(1)
M2 -2.365216 -3.139574** 1(1)
INF -2.706619* -4.907288*** 1(1)
INT -4.605514*** 1(0)
SVR -0.952982 -6.395918** 1(1)
EXR 0.688990 -4.707789*** 1(1)
FD -0.856241 -4.876972*** 1(1)
Asymptotic critical values*:
1% level -3.661661
5% level -2.960411
10% level -2.619160
Source: Author’s Compilation (2021) via EVIEW 9
Note: *, **, *** indicates significant at 10%, 5% and 1% levels respectively

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
The Augmented Dickey Fuller (ADF) test as presented in table 2 showed that only INT is stationary at level while others
variables are at first difference. The ADF test confirmed that ARDL approach is suitable for the study because the variables are of
different order. Hence the ARDL method was used in the study.

ARDL Bound Test

Table 3: Results of ARDL Bounds Test


Null Hypothesis: No long-run relationships exist
Estimated equation 𝐺𝐷𝑃 = 𝑓(𝑀2, 𝑆𝑉𝑅, 𝐼𝑁𝐹, 𝐼𝑁𝑇, 𝐸𝑋𝑅, 𝐹𝐷)
F-statistics 5.76***
Optimal lag length (3, 3, 3, 2, 3, 3, 0)
Critical values
Significance level
Lower bound I0 Upper bound I1
1% 2.12 3.23
5% 2.45 3.61
10% 3.15 4.43
Note: *** denotes significance at 1%

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.

Table 4 Long Run Coefficients of ARDL (3, 3, 3, 2, 3, 3, 0)


Dependent variable: ∆GDP
Regressor Coefficient Standard error t-Statistic Probability

𝒍𝒏𝑴𝟐 0.395791 0.044823 8.829996 0.0000


𝑰𝑵𝑭 -0.006835 0.001495 -4.571465 0.0013

𝑰𝑵𝑻 0.038384 0.015893 2.415093 0.0389

𝑺𝑽𝑹 -0.016403 0.020150 -0.814022 0.4366


𝒍𝒏𝑬𝑿𝑹 -0.316801 0.078361 -4.042831 0.0029
𝑭𝑫 -0.014435 0.006018 -2.398617 0.0400

𝑪 8.756599 0.210702 41.559161 0.0000


Source: Author’s Compilation (2021) via EVIEW 9
Note: *, **, *** indicates significant at 10%, 5% and 1% levels 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.

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Table 5: Short Run Coefficients of ARDL (3, 3, 3, 2, 3, 3, 0)
Dependent variable: ∆GDP
Regressor Coefficient Standard error t-Statistic Probability
∆𝒍𝒏𝑮𝑫𝑷(−𝟏) -0.497732** 0.169667 -2.933587 0.0167
∆𝒍𝒏𝑮𝑫𝑷(−𝟐) 0.261924** 0.093435 2.803266 0.0206
∆𝒍𝒏𝑴𝟐 -0.018600 0.027315 -0.680958 0.5130
∆𝒍𝒏𝑴𝟐(−𝟏) -0.099937* 0.050678 -1.971983 0.0801
∆𝒍𝒏𝑴𝟐(−𝟐) 0.100326** 0.038335 2.617073 0.0279
∆𝑰𝑵𝑭 -0.000522** 0.000207 -2.523235 0.0326
∆𝑰𝑵𝑻 0.003014* 0.001430 2.107459 0.0643
∆𝑰𝑵𝑻(−𝟏) -0.001325 0.001002 -1.322562 0.2186
∆𝑺𝑽𝑹 0.004325 0.003232 1.338124 0.2137
∆𝑺𝑽𝑹(−𝟏) 0.004581* 0.002471 1.853832 0.0968
∆𝑺𝑽𝑹(−𝟐) 0.011249*** 0.002559 4.395183 0.0017
∆𝒍𝒏𝑬𝑿𝑹 -0.099677*** 0.009895 -10.073602 0.0000
∆𝒍𝒏𝑬𝑿𝑹(−𝟏) -0.034880** 0.012200 -2.859137 0.0188
∆𝒍𝒏𝑬𝑿𝑹(−𝟐) -0.014507 0.010573 -1.372094 0.2033
∆𝑭𝑫 -0.004668** 0.001760 -2.652054 0.0264
𝑬𝑪𝑴 -0.323377*** 0.095505 -3.385965 0.0081
Source: Compiled by Authors (2021) via EVIEW 9
Note: *, **, *** indicates significant at 10%, 5% and 1% levels respectively

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.

Table 6 Result of Diagnostic Tests


Test Statistics P-value
Serial Correlation: CHSQ(2) 0.160667 0.6885
Heteroscedasticity 28.83524 0.1858
F-statisitics 6318 0.0000
Normality test (Jarque-Bera) 1.729990 0.4211
R-squared 0.9999
Adjusted R-squared 0.9997
Source: Author’s Compilation via EVIEW 9

Generally, the ARDL regression model fits well as it passed the entire estimation test conducted and reported in Table 6.

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Granger Causality Test

Table 7: Granger Causality


Null HYPOTHESIS F-Statistics Prob.
M2 does not Granger Cause GDP 0.79771 0.4611
GDP does not Granger Cause M2 5.70433 0.0088***

INT does not Granger Cause GDP 1.26490 0.2991


GDP does not Granger Cause INT 2.97119 0.0688*

SVR does not Granger Cause GDP 3.24060 0.0554*


GDP does not Granger Cause SVR 0.30661 0.7386

EXR does not Granger Cause GDP 2.54715 0.0977*


GDP does not Granger Cause EXR 2.55612 0.0969*

FD does not Granger Cause GDP 1.67142 0.2076


GDP does not Granger Cause FD 6.12271 0.0066***

SVR does not Granger Cause INF 10.4622 0.0005***


INF does not Granger Cause SVR 6.54689 0.0005***

INT does not Granger Cause INF 1.39668 0.2654


INF does not Granger Cause INT 4.31438 0.0241**

SVR does not Granger Cause INT 3.99878 0.0306**


INT does not Granger Cause SVR 2.37473 0.1129

FD does not Granger Cause INT 1.04117 0.3673


INT does not Granger Cause FD 0.44113 0.6480
Source: Compiled by Authors (2021)
Note: *, **, *** indicates significant at 10%, 5% and 1% levels respectively

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

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Volume 6, Issue 4, April – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
This is a reflection of the weakness in the productive capacity, [5]. Anaripour, J. T. (2011). Study on relationship between
insecurity and unstable economic policy of the country. interest rate and economic growth by E-View (2004-
2010, Iran). Journal of Basic and Applied Scientific
Contrary to the study of Odhiambo (2009) and in line Research, 1(11), 46-52.
with the study of Obamuyi (2009), financial deepening has [6]. Aspinall, N. G., Jones, S. R., McNeill, E. H., Werner, R.
had a negative effect on the economy. This may be traced to A., & Zalk, T. (2015). Sustainability and the financial
the weak financial system, which is yet to contribute system, review of literature. Institute and Faculty of
effectively and efficiently to the economy, despite the various Actuaries, London.
reforms that have taken place in the banking sector. The result [7]. Baum, S. D. (2009). Description, prescription and the
only shows that more still need to be done in order to position choice of discount rates. Ecological Economics, 69(1),
the Nigerian banking sector in the global financial market. 197–205.
[8]. Bhunia, A. (2016). How inflation and interest rates are
The Granger causality employed showed that savings related to economic growth? A case of India. Journal of
rate weakly granger causes economic growth, which is in line Finance and Accounting, 4(1), 20-26.
with the Mckinnon and Shaw hypothesis. Increase in the [9]. Etale, L. M., & Ayunku, P. E. (2016). The relationship
savings rate encourages more funds from the surplus units between interest rate and economic growth in Nigeria:
which can then be channeled to productive uses by the deficit AN error correction model (ECM) approach.
unit. As capital formation is key to economic growth. On the International Journal of Economics and Financial
other hand, GDP granger causes both lending interest rate and Research, 2(6), 127-131.
financial deepening index, which shows that the monetary [10]. Harswari, M. H., & Hamza, S. M. (2017). The impact of
policy has been more reactive than proactive so far, which interest rate on economic development: A study on
could account for the instability in the economy. In addition, Asian countries. International journal of Accounting and
inflation rate also granger causes lending interest rate, while Business Management, 5(1), 180-188.
saving rates and inflation rate both granger cause each other. [11]. Heba, E. M. S. A. (2017). The relationship between
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more attention to the savings/deposit rates more than before in comparative study with reflection on the Egyptian
order to boost the economic activities in the country. economy (Thesis), Faculty of Commercce, Zagazig
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In conclusion, the findings of this study has shown that [12]. Jelilov, G. (2016). The impact of interest rate on
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However, the savings rate needs to be given more attention Social Sciences, 6(2), 51-64.
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more beneficial to the economy, which supports the Mckinnon Delhi, Vrinda Publications.
and Shaw hypothesis. The study also suggests that monetary [14]. Lee, K. S., & Werner, R. A. (2018). Reconsidering
authority need to be more proactive rather than being monetary policy: An empirical examination of the
proactive most times. More creative reforms are needed in the relationship between interest rates and nominal GDP
financial system so as to not only provide more financial growth in the U.S., U.K., Germany and Japan.
services but also make the Nigerian banking system more Ecological Economics, 146(1), 26-34.
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