Key Features:
No of Pages: 68
No of Chapters: 5
Tables
Abstract:
This work is based on the impact of interest rate and inflation on economic growth in Nigeria (1981-2018). The main objective of this study is to determine the impact interest rate and inflation on the economic growth in Nigeria. A model were constructed to include real gross domestic product (RGDP) as the dependent variable and Interest rate and inflation as the independent variables was analyzed using the Ordinary Least-Squares (OLS) techniques.
The empirical result shows interest rate has positive and insignificant impact on the economic growth in Nigeria whereas inflation has negative and insignificant impact on the economic growth in Nigeria. Also the result indicates that the rate at which the independent explains what happens on the dependent variable is 62%. The researcher recommends that the federal government should try to as much as possible to lower the rate of inflation through promotion of entrepreneurship development, grant credit free loan to potential agricultural farmers so as to boast the level of domestic production.
Table of Content:
Title page - - - - - - - - - - i
Certification - - - - - - - - - ii
Dedication - - - - - - - - - - iii
Acknowledgements - - - - - - - - iv
Abstract - - - - - - - - - - v
Table of contents - - - - - - - - vi
CHAPTER ONE
INTRODUCTION - - - - - - - - 1
1.1 Background of the Study - - - - - - - 1
1.2Statement of the Problem - - - - - - - 4
1.3 Research Questions - - - - - - - - 5
1.4 Objectives of the Study - - - - - - - - - - 5
1.5 Statement of Hypotheses - - - - - - - 6
1.6 Significance of the Study - - - - - - - 6
1.7 Scope and Limitations of the Study - - - - 8
CHAPTER TWO
LITERATURE REVIEW - - - - - - - 9
2.1 Conceptual Literature - - - - - - - 9
2.1.1 Concept of Interest Rate - - - - - - - - 9
2.1.2 Concept of Inflation- - - - - - - - 12
2.1.3 Concept of Economic Growth- - - - - - - 13
2.1.4 Relationship between Interest Rate and Economic Growth- - 15
2.1.5 Relationship between Inflation and Economic Growth- - - 16
2.2 Theoretical Literature - - - - - - - 17
2.2.1 Theories of Interest Rate - - - - - - - - 17
2.2.1.1 The Expectations Theory- - - - - - - 17
2.2.1.2 Segmented Markets Theory- -- - - - - 17
2.2.1.3 The Liquidity Premium Theory- - - - - - 18
2.2.2 Theories of inflation- - - - - - - - 19
2.2.2.1 Structural inflation theory- - - - - - - 19
2.2.2.2Rational Expectations Theory- - - - - - - 20
2.2.2.3 New neoclassical synthesis of inflation- - - - - 21
2.2.3 Theories of Economic Growth- - - - - - 21
2.2.3.1 Neo-Classical Growth- - - - - - - 21
2.2.3.2 Endogenous Growth Theory- - -- - - - 22
2.2.3.3 HarrodDomar Growth Model- - - - - - 22
2.3 Empirical Literature - - - - - - - 23
CHAPTER THREE
METHODOLOGY - - - - - - - - 32
3.1 Theoretical framework - - - - - - - 32
3.2 Model specification - - - - - - - 33
3.3 Method of Evaluation - - - - - - - - 33
3.3.1 Preliminary Tests- - - - - - - - - 33
3.3.1.1 Unit Root/Stationary Test- - - - - - - 33
3.3.1.2 Co-integration test- - - - - - - - 34
3.3.1.3 Error Correction Model (ECM)- - - - - - 34
3.3.2 Economic Criterion Test (A priori Test)- - - - - 35
3.3.3 Statistical Test of Significance- - - - - - - 36
3.3.3.1 Test for Goodness of Fit - - - - - - - 36
3.3.3.2 t-Test of Significance - - - - - - - 36
3.3.3.3 f-test of Significance- - - - - - - - 36
3.3.4 Econometrics Test of Significance- - - - - - 37
3.3.4.1 Autocorrelation Test- - - - - - - - 37
3.4 Granger Causality Test- - - - - - - - 38
3.5 Data Required and Sources - - - - - - 39
3.6 Econometric Software for the Work - - - - - 39
CHAPTER FOUR
4.0 RESULT AND DISCUSSION- - - - - - - 40
4.1Regression Results - - - - - - - - 40
4.1.1 Unit Root Test Results - - - - - - - 40
4.1.2 Co-integration Test Result - - - - - - 40
4.1.3 Result of Error Correction Mechanism Result - - - - 41
4.2 Evaluation of Regression Results - - - - - - 42
4.2.1 Evaluation Based on Economic Criterion - - - - 42
4.2.2 Evaluation Based On Statistical Criterion - - - - 43
4.2.2.1 R2 –Result and Interpretation - - - - - - 43
4.2.2.2 t–Test Result and Interpretation - - - - - 43
4.2.2.3 Result of f–Test of Significance - - - - - 44
4.3 Evaluation Based on Econometric Criterion - - - - 44
4.3.1 Result and Interpretation of Autocorrelation Test - - - 45
4.3.2 Granger Causality Test: Result and Interpretation - - - 46
4.4 Evaluation of Research Hypotheses - - - - - 46
4.5 Discussion of the Results - - - - - - - 46
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS- - 47
5.1 Summary of Findings- - - - - - - - 47
5.2 Conclusion - - - - - - - - - 47
5.3 Recommendations - - - - - - - - 47
REFERENCES - - - - - - - - - 49-55
Appendices -- - - - - - - - - - 56-62
Introduction:
The behaviour of interest rate, to a large extent, determines the investment activities and hence economic growth of a country. Investment depends upon the rate of interest involved in getting funds from the market, while economic growth to a large extent depends on the level investment. If the rate is high, investment becomes low (Jhingan, 2010). A low rate of interest leads to a high level of investment. There is therefore a need to promote an interest rate regime that will ensure “inexpensive” spending for investment and consequently enhancing economic growth at low financial cost.
Udeze, (2017) opined that interest rate is a critical variable in the loanable funds market, given its role in the mobilization and efficient allocation of financial resources. Prior to the adoption of the Structural Adjustment Programme (SAP) in 1986, the financial authorities in Nigeria fixed the level and structure of interest rate. The major reasons for regulating interest rates were: the desire to obtain the social optimum in resource flow to the preferred sector; promote an orderly growth of the financial markets; combat inflation and lessen government’s debt service burden. In order to facilitate the flow of domestic credit to the priority sectors, discriminatory and below market interest rates were fixed for credit to agriculture, manufacturing and residential housing construction. This policy generally led to the unintended consequences of moral hazard and adverse selection (Adebiyi 2015).
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Nigeria as a nation is by no means immune to the menace of inflation. Hence, after an appreciable economic performance in the early 1970s, the Nigerian economy witnessed some anxious moments from the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level. The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level. This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability (Salam et al, 2006).
The inflation rate in Nigeria jumped from 6.938 in 2000 to 18.869 percent in 2001, 12.883 percent in 2002, 14.033 percent in 2003, 15.001 percent in 2004, 17.856 percent in 2005, and down to 8.218 percent in 2006 and 5.413 percent in 2007. It further rose steadily to 11.581 percent in 2008, 12.543 percent in 2009 and 13.72 percent in 2010. This trend reveals that within a period of two decades, that Nigeria only witnessed single digit inflation rates in seven years (1986, 1990, 1989, 1999, 2000, 2006 and 2007) which is indicative of negative signals of Nigeria’s investment environment (IMF, 2011).
Inflationary pressure in Nigeria has several negative implications on the economy leading to poor domestic production as the cost of producing domestically discourages the investors at the domestic economy giving rise to more importation at the expense of export with the effect of creating deficit balance of payment especially the non-oil trade balance.
The financial sector reforms, which commenced in July 1986, relied on market forces. Its objective was the elimination of financial repression in order to improve the incentive structure and ensure allocative efficiency. The policy stance of the regulatory authorities has been guided by the general economic conditions and developments in the financial markets (Udeze, 2017). At various times, there had been policy shifts induced by the need to deal with emerging problems. However, by October 1996, all forms of control on interest rates had been removed, following further liberalization of the financial sector, thus the Central Bank of Nigeria’s minimum rediscount rate became the nominal anchor of its interest rate in the flow of banks credit, which averaged 19.8 percent in 1980 – 1986, 28.6 percent in 1987 – 1996 and averagely 42.9 percent in 1997 – 2000s respectively. However, the unintended consequence of the policy shift from controls to liberalization has been the rise in interest rates, especially between 1986 and 1993. Interest rate was relatively stable between 1994 and 1997 and, thereafter, became volatile (CBN, 2015)
Based on the foregoing, this study is aimed at carrying out an empirical analysis on the impact of interest rate and inflation on economic growth in Nigeria covering the period 1981-2018.
1.2 Statement of the Problem
The influence of interest rate and inflation in determining the level of economic growth in an economy cannot be overemphasized. However, the role of interest rate and inflation in the growth process of the Nigerian economy is uncertain. This is as a result of the frequent changes in monetary policy and the effects of substantial oil revenue at the disposal of the government. The general view is that interest rate has an impact on growth but the degree of impact in Nigeria is unclear. Over the years, interest rate has been fluctuating and this has adversely affected the level of domestic and foreign investment in the economy. Various measures have been taken by the government to stabilize the level of interest rate and inflation in the economy but these steps and policy strategies were ineffective in the economy. Firstly, through the Central Bank of Nigeria (CBN), the interest rate has been pegged at various rates so as to prevent fluctuations and volatility movements. This was facilitated by the policy of interest rate deregulation in the economy in 1986. However, despite these policies, the level of interest rate and inflation has not been impressively stable. This study is thus focused on the evaluation of the impact of interest rate and inflation on economic growth in Nigeria.
1.3 Research Questions
In the course of this study, the following research questions will be addressed:
1. What is the impact of interest rate and inflation on economic growth in Nigeria?
2. What is the causality relationship between interest rate, inflation and economic growth in Nigeria?
1.4 Objectives of the Study
The general aim of this study is to evaluate the impact of interest rate and inflation on economic growth in Nigeria. The specific objectives of the study include:
1. To ascertain the impact of interest rate and inflation on economic growth in Nigeria.
2. To evaluate the causality relationship between interest rate, inflation and economic growth in Nigeria.
1.5 Hypotheses of the Study
The following hypotheses of the study will be tested:
Ho: Interest rate and inflation have no significant impact on economic growth in Nigeria
Ho: There is no causality relationship between interest rate, inflation and economic growth in Nigeria.
1.6 Significance of the Study
A research draws its relevance from the present and prospective beneficiaries and its contribution(s) to academia at large. The pertinence of this research is justified on the grounds that it will show the impact of interest rate on economic growth in Nigeria for the years under review; and thus provides a framework for policy prescriptions and interventions. In furtherance to the above, this research will find its relevance as made evidence in the following:
The Banking Sector: The banking sector will benefit significantly from this study as it will reveal the impact of interest rate on economic growth in Nigeria. This is because the banking sector use interest rate as an instrument of lending and this study will show the impact it has on economic growth in Nigeria over the years.
Government: The federal government will find this study highly relevant as it will provide a picture of the relative impact of interest rate on the economic growth and thus motivate relevant policy reforms or sustenance. This research will also find its relevance in the coffers of financial variable analysts given that the subject under study is purely a monetary phenomenon.
Subsequent Analysts: This investigation will also serve as a stepping stone for researchers who develop interest in carrying an empirical analysis on the concept of interest rate and economic growth.
Scholars: Students will find this piece highly relevant as it will undeniably increase their knowledge horizon on the concept of interest rate and economic growth.
The Academia: The education sector is also considered as one of the significant beneficiaries because it is believed that this research will be an addition to the existing stock of knowledge.
1.7 Scope and Limitations of the Study
The primary focus of this study is to carry out an empirical analysis of the impact of interest rate and inflation on economic growth in Nigeria between1981-2018.
In the course of carrying out this research, the researcher was confronted with a lot of limiting threats which amongst others included time constraint, dearth of data and some discouraging attitudes from the staff of some statistical agencies. However, despite these limitations, the researcher will ensure that the objectives of the study are duly met and actualized.
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