The Impact of Interest Rate on Domestic Investments and Nigerian Economic Growth

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nternational Journal of Research and Innovation in ed Applied Science (IJRIAS) | Volume IV, Issue X, October 2020 | ISSN 2454–6186

The Impact of Interest Rate on Domestic Investments and
Nigerian Economic Growth

1Okeke, C. Charles and 2Awogbemi, C. Adeyeye
1 Department of Statistics, Nnamdi Azikiwe University, Awka, Nigeria
2 Department of Statistics, National Mathematical Centre, Abuja, Nigeria.

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The paper investigated the impact of interest rate on domestic investments and economic growth of Nigeria using time series analysis and annual data from 1980-2016. Using interest rate, inflation rate, money supply and the rate of economic growth as independent variables and domestic investment as dependent variable, the study applied Auto -Regressive Distributed Lag (ARDL) method. This is based on the outcome of ADF unit root tests which revealed that the variables are integrated of I(1) and I(0). The ARDL bounds test result provided evidence of a stronghold long run relationship among the variables. This necessitated the estimation of ARDL short run and long run results. The short run results of the model revealed that MS (-2) is significant but with positive impact of interest rate on domestic, investments and economic growth of Nigeria. The long run results indicated that MS was made significant but with negative impact on Nigeria Domestic Investment. The impacts of INTR, INF, MS, MS (-1) and EGR were positive and negative in both long and short runs. The outcome of the diagnostic tests supported the acceptability of the model results and it was concluded that over the years, the cause of low investment in Nigeria is due to high and fluctuating interest rates. Thus, the formulation and implementation of financial policies that enhance investment-friendly rate of interest is necessary for promoting economic growth in Nigeria.

Keywords: Interest Rate, Domestic Investment, Economic Growth, Auto-Regressive Distributed Lag (ARDL), Unit root test.

1. Introduction

The most important tasks of any economy is to allocate its capital resources across different possible investment outlays, and that in deciding upon the best investment opportunity, one needs to evaluate the costs and benefits associated with that investment (Samuelson, and D.N. ,2010).