Review of Interest and Exchange Rates Relationship and the Implications for Nigeria's Economy

Abstract

This study examined the relationship between savings rate and prime lending rate on one hand and exchange rate on the other and how the relationship transmit into the economy. The instability and persistent fall in the value of the Naira and the implications on the economy, warrants another look on this topic. Relying on theories and available data, a system of equations within the seemingly unrelated regression technique was analyzed for the Nigerian economy using quarterly series over 2011 to 2021. The findings reveals that savings rate and prime lending rate had the ability to cause the Naira to appreciate, though they could not do it significantly. The prime lending rate had significant positive relationship at 5% with real output. A point increase in prime lending rate led to 1.53 points increase in real output in the economy. Aggregate investment has the ability to appreciate the Naira, andit did that significantly at 1%. Exchange rate had positive significant relationship at 1%, with real output growthin the economy over the period examined. It is thus recommended among othersthat monetary policy be fine-tuned to allow the rates unleash their potentials on the economy, while foreign exchange leakages are blocked.