Effects of Interest Rate on Domestic Investment in Nigeria: Linear and Non-Linear Approaches

Abstract

This work investigated the impact of interest rates variations on investments in Nigeria, for the periods between 1981 and 2018. The linear and non-linear Autoregressive lagged (ARDL and NARDL) techniques were employed to capture both the long-run and short-run dynamics of the variables as well as the asymmetric effects of interest rate on investment in the model. On the whole, investment behaviour was found to be insensitive to interest rate in Nigeria looking at it both from the linear and non-linear ARDL techniques employed in the model. Judging from the asymmetry test, some slight level of asymmetry was found to hold between positive and negative interest rate values. This holds at a 12% level of significances using the stepwise regression result. So, whether or not we aggregate or decompose interest rate into its positive and negative changes, it was found not to impact investment greatly it rather affected their relationship which happens to be in line with economic theory. Specifically, the empirical results of the ARDL indicated that a fall in the prime lending rate by one unitcaused an increase in investments by 0.230 units however this inverse relationship was not statistically significant. Whereas, the NARDL and general to specific least square regressionresults for both positive and negative increase in a year lag value of prime rate by one unit were found to result to a decline in current investment level by 0.0025 and 0.1066 units, as well as 0.3052 and 0.2391. Note alsothat both the increased and
decreased interest rate changes have non-significant inverse relationship with investment. Consequently, we recommended among others; a loosening of interest rate by the monetary authority but, under strict scrutiny. This is needed in order to maintain the appropriate threshold and to create an effective and efficient interest rate transmission channel, to engender productive sectors as well as creating a conducive business environment for investment to strive, which will in turn promote domestic investment and economic growth in Nigeria.