EFFECT OF INTEREST RATE FLUCTUATION ON INVESTMENT AND ECONOMIC GROWTH IN NIGERIA

Abstract

The study examines the impact of interest rate fluctuations on Investment (Gross Fixed Capital Formation (GFCF), Private Sector Investment (PSINV)) and Economic Growth (Real Gross Domestic Product (RGDP) The Central Bank of Nigeria (CBN) Statistical Bulletin and World Development Indicators were used as sources for the annual time-series data. The short-run dynamics and the long-run relationships between the variables were analyzed through the use of unit root and Johansen cointegration tests, respectively and the Vector Error Correction Model (VECM) was employed. These outcomes indicated that the short-run changes in interest rates have a negative impact on GFCF, PSINV and RGDP, but not statistically significant. The other two variables, GFCF and PSINV, also had weak and statistically non-significant negative relationships with economic growth; and marginally significant negative relationships with economic growth, respectively. An error correction term was negative and statistically significant which means that around 37.6 per cent of the short run disequilibrium were corrected towards long-run equilibrium in every period. The study results indicate that the interest rate volatility in the longer-term period has a weak direct impact but strong indirect impact on investment and economic growth. The study suggests continuity and stability in interest rates for productive investment and sustainable growth of the Nigerian economy.