the impact of interest rate liberalization …€¦ · response to public expenditure and 0 ......
TRANSCRIPT
1
THE IMPACT OF INTEREST RATE LIBERALIZATION ON
INVESTMENT IN NIGERIA
BY
HITLAR, INEDU
(PG/M.Sc/12/62808)
Phone: 07081022293, 08032122813
DEPARTMENT OF ECONOMICS
UNIVERSITY OF NIGERIA, NSUKKA
SUPERVISOR: REV. FR. (PROF) H.E ICHOKU
AUGUST, 2015.
i
THE IMPACT OF INTEREST RATE LIBERALIZATION ON
INVESTMENT IN NIGERIA
BY
HITLAR, INEDU
(PG/M.Sc/12/62808)
Phone: 07081022293, 08032122813
An M.Sc dissertation submitted to the Department of Economics
Faculty of the Social Sciences, University of Nigeria, Nsukka
In Partial Fulfilment of the Requirements
For the Award of Master of Science
(M.Sc) Degree in Economics
SUPERVISOR
REV. FR. (PROF) H.E ICHOKU
AUGUST, 2015
ii
CERTIFICATION
This is to certify that Hitlar,Inedu an M.Sc student of the University of Nigeria, Nsukka
with registration number PG/M.Sc/2012/62808 has successfully completed the research required
for the Award of Master of Science Degree in Economics in the afore mentioned institution.
The work covered in this project is original and has not been submitted in part or full for
any other degree of this University or any other University.
…………………………………….. Date…………………………..
Rev. Fr. (Prof) H.E Ichoku
Supervisor
…………………………………….............. Date…………………………..
Professor S. I.Madueme
Head of Department
iii
APPROVAL
This research work titled: “The Impact of Interest Rate Liberalization on Investment in Nigeria”
has followed due process and has been approved to have met the requirement for the award of
the Master of Science degree in Economics, University of Nigeria, Nsukka.
Approved
………………………………… Date…………………………..
Rev. Fr. (Prof) H.E Ichoku
Supervisor
………………………………… Date…………………………..
Professor S. I. Madueme
Head of Department
………………………………….. Date…………………………..
Dean Faculty of Social Sciences
Professor I. A. MADU
……………………………….
External Examiner
iv
DEDICATION
To GODAlmighty, My wife Joy,Ojoneand wonderful Kids Jessica,Chubiyojo and
Jose-Franklyn,Eyiojo.
v
ACKNOWLEDGEMENT
I am greatly indebted to my supervisor, Rev. fr. (Prof) H.E. Ichoku whose rigorous
scrutiny and material contributions enhanced the quality of this work. I commend his useful and
objective advice and criticisms towards the successful completion of this thesis. I pay homage to
him for his useful comment.
I am so grateful to all the lecturers in the department most especially; Dr. Eze B, Dr.
NwosuE, Dr. Edeme R, Dr. Innocent (SPG), Mr. Johnson N, and all the lecturers that taught me
during the course work sessionand contribute to the knowledge which I acquire today, for their
friendly relationship is what made the university environment a place worth living for me
Thanks to my parents Elder and Deaconess Hitlar, J.E for their moralencouragement of
which without them I wouldn‟t have being where I am today. Also to my beloved siblings, Dr.
Chuba, M.A, Major (Elder) Agada J.A & family, Daniel Agada (USA), Cletus Sam (Canada),
Dr. Okpanachi, S. S, Dr. Ene I. O, and Mr. Simon Sule& family (Nsukka) for their support in the
course of this program.
Special thanks to Innocent Chile (Prof), Henry Asogwa, KarimoTari Moses, Emmanuel
Asuquo,Susan Fachano (Hajia) and my entire roommate for their assistance in one form or the
other to keep me going.
Finally, I thank the Almighty God who gives me the idea. When Pythagoras was praised
for being wise, he said “I am not wise, only God is wisdom; I am only a lover of wisdom”.
May God Bless You All.
vi
TABLE OF CONTENTS
Title page … … … … … … … … … …… … i
Cover page … … … … … … … … … …… … ii
Certification page … … … … … … … …… … … iii
Approval page … … … … … … … …… … … iv
Dedication … … … … … … … … … … v
Acknowledgement … … … … … … … … …vi
Abstract … … … … … … … … …… vii
CHAPTER ONE
INTRODUCTION
1.1 Background to the study… … … … … … … … 1
1.2 Statement of the problem… … … … … … … … 3
1.3 Research Questions… … … … … … … … … 5
1.4 Research Objectives… … … … … … … 5
1.5 Research Hypotheses… … … … … … … … 5
1.6 Policy Relevance of the study... … … … … … … 6
1.7 Scope of the study… … … … … … … … … 6
CHAPTER TWO
POLICY CONTEXT OF INTEREST RATE LIBERALIZATION IN NIGERIA
2.1 Management of Interest Rate prior to 1986 … … … … … … 7
2.2Management of Interest Rate since 1987 … … … … … … 8
CHAPTER THREE
REVIEW OF RELATED LITERATURE
3.1 Conceptual framework … … … … … … … … 11
3.2Theoretical framework … … … … … … … … 12
3.2.1 Theories of Interest Rate… … … … … … … … 12
3.2.2 Theories of Investment … … … … … … … … 14
3.3 Empirical Literature… … … … … … … … … 17
3.4 Limitation of previous studies … … … … … … … 23
CHAPTER FOUR
METHODOLOGY
4.1 Theoretical framework … … … … … … … … 25
4.2 Model specification … … … … … … … … 27
4.3 Method of estimation … … … … … … … … 29
4.4 Justification of the model … … … … … … … … 30
vii
4.5 source of data … … … … … … … … … 31
CHAPTER FIVE
PRESENTATION AND ANALYSIS OF RESULTS.
5.1 Descriptive analysis of variable … … … … … … … 32
5.2 Pre-Diagnostic tests … … … … … … … … 33
5.2.1 Unit root test result … … … … … … … … 33
5.2.2 Co-integration test … … … … … … … … 34
5.3 Presentations of regression result and interpretation … … … … 35
5.3.1 Error correction model … … … … … … … … 35
5.3.2 Innovation accounting … … … … … … … … 37
5.4 Evaluation of research Hypothesis … … … … … … 38
5.4.1 Test of working Hypothesis i … … … … … … … 38
5.4.2 Test of working Hypothesis ii … … … … … … … 39
5.4.3 Test of working Hypothesis iii … … … … … … … 39
5.5 Chapter summary and prospects … … … … … … … 40
CHAPTER SIX
SUMMARY, POLICY RECOMMENDATIONS AND CONCLUSION
6.1 Summary of research finding … … … … … … … 41
6.2 Policy recommendation … … … … … … … … 42
6.3 Conclusion … … … … … … … … … 43
6.4 Recommendation for further studies … … … … … … 44
Appendix A … … … … … … … … … … 46
Appendix B … … … … … … … … … … 47
Appendix C … … … … … … … … … … 55
Reference … … … … … … … … … … 60
viii
ABSTRACT
The importance of investment in economic growth cannot be overemphasized. This has led to an
upsurge in the study of its determinants. This research therefore, seeks to investigate the impact
of interest rate liberalization on investment in Nigeria from 1970-2012. Using the Error
Correction Model (ECM), the result indicates that a long run relationship exists among the
variables. The result further reveals that all the variables have significant impact on investment.
The study equally shows that there is no differential impact of interest rate liberalization on
investment in Nigeria during the pre and post-liberalization regimes. Also, the impulse responses
of these variables to shocks in theextraneous variables were verified; using the Multiple-
Equation VAR models. In addition, the variance decomposition result shows thatPeriod 2 shows
a standard deviation value of 97.23 in investment resulting from own shock, 2.44 to a response
to a shock from interest rate, 0.0186 to a response from market capitalization rate,0.205900 to a
response to public expenditure and 0.101933 to response to trade openness. In period 10,
investment responds positively with a standard deviation of 18.77 originated from own shock
and standard deviation values of 8.05, 7.94, 12.43 and 15.59 arising from a shock from interest
rate, market capitalization rate, public expenditure and trade openness respectively. It is
recommended that polices to make interest rate attractive to investors as well as improve trade
should be encouraged. Also broadening the capital market and improving infrastructure through
increased capital expenditure should be pursued. In addition to these, there should be
consistency in policies so that policy summersaults does not affect investment.
1
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The Nigerian economy has at different times witnessed enormous interest rate swings in different
sectors of the economy since the 1970s and mid 1980s under a regulated regime. The preferential
interest rates were based on the premise that the market, if freely applied would exclude some
priority sectors. Thus, interest rates were adjusted through the market forces in order to promote
increased level of investment in the various preferred sectors of the economy. Prominent among the
preferred sectors were the agricultural, manufacturing and solid mineral sectors which were
accorded priority and deposit money banks were directed to charge preferential interest rates on all
loans to encourage the upsurge of small-scale industrialization which is a catalyst for economic
development (Udoka, 2000). According to Mckinnon (1973) and Shaw (1973), this situation can
ignite financial repression which occurs mostly when a country imposes ceiling on deposit and
lending nominal interest rate at a low level relative to inflation. The resulting low or negative
interest rates discourage savings mobilization and the channelling of mobilized savings through the
financial system. This has a negative effect on the quantity and quality of investment and hence
economic growth.
Closely followed by the regulated interest rate regime was the interest rate reform, a policy evolved
under the financial sector liberalization. The policy was put in place to achieve efficiency in the
financial sector, thus, engendering financial deepening. In Nigeria, financial sector reforms started
with the deregulation of interest rate in August, 1987 (Ikhide & Alawade, 2001). Since then, the
Nigerian government has been pursuing a market determined interest rate which does not permit a
direct state intervention in the general direction of the economy (Nyong, 2007).
Since the introduction of the interest rate liberalization concept in the 1980s, many countries such as
Angola, Burundi, Congo, Ivory Coast, Ghana, Malawi, Nigeria, China, India etc. have made
attempts at liberalizing their financial sectors by deregulating interest rate, eliminating or reducing
2
credit controls, allowing free entry into the banking sector, giving autonomy to commercial banks,
permitting private ownership of banks and liberalizing international capital flows financial
repression has retarded the development process as envisaged by Shaw (1973). Undoubtedly,
government past efforts to promote economic development by controlling interest rate and
securing inexpensive funding for their own activities have undermined financial development.
(Arturo, Fabio, & Andrew, 2003).
The liberalization of the interest rate system, mainly by raising interest rates, was a policy measure
adopted by the Nigerian Government to increase private saving. The objective was to make and
maintain positively in real terms as the upsurge in inflation in the 1970s had rendered them negative
and there were rigid exchange and interest rate controls resulting in low direct investment. Funds
were inadequate as there was a general lull in the economy. Monetary and credit aggregates moved
rather sluggishly. Consequently, there was a persistent pressure on the financial sector, which in
turn necessitated a liberalization of the financial system (Soyibo & Olayiwola, 2000).
In response to these developments, the government deregulated interest rate in 1987 as part of the
Structural Adjustment Program (SAP). The official position then was that interest rate liberalization
would, among other things, enhance the provision of sufficient funds for investors, especially
manufacturers (a priority sector), who are considered to be the prime agents of investment, and by
implication, promotes economic growth (Odhiambo, 2009). However, in a dramatic policy
reversal, the government in January, 1994 out-rightly introduces some measures of regulation into
interest rate management. It was claimed that there are more wide variations and unnecessarily high
interest rate under the complete deregulation of interest rate immediately, deposit rate were once
again set at 12% - 15% per annum while a ceiling of 21% per annum was fixed for lending (CBN
2012).
The high interest rate observed in Nigeria during the era of interest rates deregulation has been
frequently blamed for the country‟s slow growth and pointed out as a major failing of the
Adjustment Program initiated in August, 1986. The believe is premised on the assumption that the
demand for funds is for the purpose of investment and that investment demand will be larger at a
lower lending rate. This study regards that such blame is largely for obvious reasons. First interest
rate deregulation lead to an increase in saving mobilization in Nigeria (Chuba, 1997). While it is
impossible to achieve economic growth without adequate investment, saving generates investment.
3
Secondly, investment does not depend upon interest rate alone, for instance investors may be
prepared to borrow more and invest more, even if interest rate are high provided they anticipate a
higher margin of profits. On the other hand, investors are not tempted to borrow even if interest rate
are very low, or even zero if they are afraid that they may lose even their capital. In other words,
investment depends upon risk and the prospects of profits in a particular industry-or what Keynes
(1936) calls the marginal efficiency of capital rather than upon interest rates. Thirdly, interest rate
is just one among many factors that have negative effects on investment. For example, the
deregulation of Nigerian economy went beyond interest rates reform policies rather than interest
rate deregulation to be the major obstacle to investment expansion in Nigeria.
The policy on interest rate introduced in 1994 was retained in 1995 with a minor modification to
allow for flexibility. The policy stayed in place until it was lifted in October 1996. The lifting
remained in force till date, thus enabling the pursuit of a flexible interest rate regime in which bank
deposit and lending rate were largely determined by the forces of demand and supply for funds
(Omole & Falokun, 1999).
1.2 Statement of the problems
Prior to the deregulation of interest rate in Nigeria, the prevailing rates of interest were regulated
by government through the Central Bank of Nigeria (CBN). This was meant to guide the economy
to follow the desired direction. However, it was soon realized that, the low rates of interest that
prevailed could not be sustained (for example the real lending rates were 3.60, -4.40,-13.20,-9.40,-
6.93,-2.63,-1.40 and -11.73 percent in 1973, 1974, 1977, 1978, 1979, 1980 and 1981 respectively
(Chuba, 2005). This very low and sometimes negative real interest rates discouraged savings. Also,
the low rates did not only increase the demand for loanable funds but also misdirected credit.
Consequently, the demand for credit soon exceeded the supply of funds while essential sectors of
the economy were starved of funds. It was against this background that the Nigerian interest rate
system was deregulated in the second half of the 1980. A major objective of the deregulation
exercise was to increase savings for investment and economic growth. But despite this effort,
investment is still in the doldrums because the deposit rate is low and that discouraged savings
which translate into higher interest rate and therefore low investment. The deregulation exercise has
been met with mixed feelings in Nigeria, while some believe it would enhance economic
performance, others have contrary opinion. Nwankwo (1989) opine that interest rate deregulation
will definitely lead to more efficient allocation of financial market resources. His position is in line
4
with the arguments of Mckinnon (1973) and Shaw (1973). Abiodun (1988), on the other hand holds
that deregulation of interest rate is like a double-edged sword, which will either stimulate or mar the
economy. He asserts that the deregulation of interest rate will lead to an increase in interest rate,
which will increase savings. This high cost of borrowing might bring about cost-push inflation as
borrowers of funds will pass the high cost of borrowing to the customers by pushing up prices.
Ojo (1988) & Ani (1988) are both of the opinion that interest rate deregulation would mar the
Nigerian economy. In their separate studies, they flawed the deregulation exercise, claiming it
would discourage investment and hence economic growth, by pushing up interest rates. They
believe that since domestic financial markets are to some extent structurally oligopolistic, if interest
rate is left uncontrolled, it might lead to a sharp increase in lending rate which will translate to
increase in cost of capital and discourages investment. This position is supported by Soyibo &
Olayiwola (2000) and Akpan (2004) who all pointed out the low positive impact of deposit rate on
investment after interest rate liberalization in Nigeria.
Okogo & Osafo-Kwaako (2006), believe that, with the Structural Adjustment Programme in 1986,
market based reforms were to ensure that true cost of capital would be achieved in Nigeria.
However, the initial attempt at interest rate liberalization yielded poor results. A poorly supervised
and inefficient financial sector, weak institutions and poor governance created opportunities for
arbitrage, patronage and rent-seeking behaviour.
The high interest rate observed in Nigeria during the era of interest rate liberalization (17.5%,
26.8%, 20.18%, 24.85%, 17.59% and 16.79% in 1987, 1989, 1995, 2002, 2010 and 2012
respectively) have been frequently blamed for the country‟s slow growth and therefore a major
failure of Structural Adjustment Programme (SAP) initiated in August 1987. This belief is premised
on the assumption that, the demand for funds is for the purpose of investment and that investment
demand will be lower at higher lending rate ( for example, investment was at 19.835%, 19.879%,
15.145%, 30.472%, 25.842% and 22.139% in 1987, 1989, 1995, 2002, 2010 and 2012). (CBN
2012).
This change of interest rate policy is a problem because of two main reasons, first, investment
contraction in Nigeria may not have any connection with the increase in lending rate that
accompanied interest rate liberalization. Just as it was in 1987 when interest rate is 17.5% and
5
investment was 19.835%, an increase in interest rate in 1989 (i.e. from 17.5% to 26.8%) was also
accompanied by increase in investment (i.e. from 19.835% to 19.879%). Secondly, low interest rate
policy, which the regulation of interest rate implies could discourage saving mobilization. However,
it is impossible to achieve economic growth without adequate investment, saving generates
investment. (Chuba,2005). These problems give raise to this study to find out the structural changes
that have taken place in the economy during the pre-liberalization and the post-liberalization
regime. Although many works have not compare the two periods to see how investment response to
the changes in interest rate over time in Nigeria.
There is therefore the need for a comparative analysis of the impact of interest rate liberalization in
promoting investment in Nigeria. This forms bedrock of the present study, in line with this
therefore, the study will address the following question. Equally, answers to these questions would
enable us to access the desirability or otherwise of the occasional resort to financial system
regulation and control as practiced between 197 -2012.
1.3 Research Question
i. To what extent has interest rate affected investment in Nigeria?
ii. What is the differential impact of interest rate liberalization on investment in Nigeria
during the pre and post-liberalization regimes?
iii. What is the difference in the structural response of investment to changes in interest rate
in Nigeria overtime?
1.4 Objectives of the Study
The major objective of this research is to analyze the impact of interest rate regulation and
deregulation on investment in Nigeria. The specific objectives are:-
i. To examine the impact of interest rate on investment in Nigeria.
ii. To determine the differential impact of interest rate liberalization on investment in
Nigeria during the pre and post-liberalization regimes
iii. To examine the structural responses of investment to changes in interest rate in Nigeria
overtime.
1.5 Research Hypotheses
Based on the objective of the study, the following null hypotheses are proposed.
6
Ho1: Interest rate has no significant impact on investment in Nigeria.
Ho2: There is no differential impact of interest rate liberalization on investment in Nigeria
during the pre and post-liberalization regimes
Ho3: There are no structural responses of investment to changes in interest rate in Nigeria
overtime.
1.6 Policy Relevance of the Study
This study will be helpful in analyzing how the impact of interest rate liberalization on
investment in Nigeria has been before the regime of interest rate deregulation and after the
regime. It also investigates the interest rate deregulation and investment relationship by taking
into consideration the transmission mechanism through which interest rate affect investment.
The study is also relevant because it will make a comparative analysis between the impact of
deregulated interest rate on investment and that of regulated interest rates on investment. As a
result, the outcome of this study shed more light on the role of interest rate in economic
development in Nigeria. Consequently, this work will be useful to Government and monetary
policy makers in their quest to improve financial intermediation in the economy. Also, by
raising specific issues concerning the link between interest rate and economic performance
(investment) in Nigeria, this study provides a basis for further in-depth investigation in this area.
1.7 Scope of the Study
This study is a macro level analysis which will involve time series elements, thus the
econometric analysis of the impact of interest rate liberalization on investment is based on the
Nigeria economy for the period 1970-2012. These years are chosen owing to the availability of
time series data for the variable of interest indicator. The main variables of interest in this study
are investment which is proxy by Gross Domestic Investment (dependent variable); and interest
rate, market capitalization rate, public expenditure, and trade openness as explanatory variables.
7
CHAPTER TWO
POLICY CONTEXT OF INTEREST RATE LIBERALIZATION IN NIGERIA
Interest rate in Nigeria over the years has played a pivotal/dominant role as one of the
instruments used by the Federal Government in managing Monetary Policy. The use of Interest
rate as an instrument of monetary policy was based on two main assumption on Interest rate
regulation; more so that, interest rate has since remained one of the instrument of managing
monetary policy of the Federal Government of Nigeria, Interest rate guidelines/regulations have
always been contained either in the Federal Government Annual Budget document or the
monetary/credit policy circular of the Central Bank of Nigeria (CBN) from time to time.
(Akingunola 2012) As the positive relationship between investment and economic development
is well established, it therefore becomes expedient for any economy that wishes to grow to pay
proper attention to changes in interest rate. Nigeria being a country in dire need of development
cannot overlook the important role interest rate could play in this direction. Interest rate
liberalization policy in Nigeria is discussed along the dividing period of pre-liberalization (1970-
1986) and post liberalization (1987-2012) periods.
2.1 Management of Interest Rate Prior to 1986
Prior to the Structural Adjustment Programme in 1986, the level and structure of interest rate
were administratively determined by the central bank of Nigeria. Both deposit and lending rates
were fixed by the Bank based on policy decision, at that time, the major reason for administering
interest rate were the desire to obtain the social optimum in resource allocation, promote orderly
growth of the financial market, combat inflation and lessen the burden of internal debt servicing
on the government. In implementing credit policy, the sector of the economy were classified into
three categories; preferred, less preferred, and other. The preferred category included
Agriculture, Manufacturing, and Residential housing; while the less preferred sectors consist of
important and general commerce. In the group of “others” were Credit and Financial institutions,
Government and “Personal and Professional” sectors. Such a classification enabled government
to direct financial resources at concessionary interest rate to sector considered as priority areas.
The concessionary rate were typically below the minimum rediscount rate (MRR) which was
itself quite low, averaging about 7.25% below 1978 and 1985. The prevailing rates were unable
8
to keep pace with inflation, resulting in negative real interest rates. Moreover, the demand for
credit soon exceeded the rate of saving and a large proportion of government borrowing had to
be financed by the central bank.
Other implication of low interest rate policy was that even “preferred sector” could not get
access to funds partly because financial institutions were unable to raise sufficient loanable funds
through savings or from the money market at the favoured/concessionary rate of interest. A case
in point was the directive to the banks to lend to Agriculture at 7% in 1984 when the average
saving deposit rate was 9.80%. Over all, the low interest rate regime resulted in inefficient
production and excessive demand for credit. (CBN Briefs 1996). The pre-liberalization period
(1970-1986) is considered as a period of financial repression and was characterized by a highly
regulated monetary policy environment in which policies of directed credits; interest rate ceiling
and restrictive monetary expansion were the rule rather than the exception (Soyibo & Olayiwola,
2000). Although, the interest rate policy instruments remained fixed, there were marginal
increases for instance; the deposit rate was increased from 4.5% in 1975 to 10% in 1986, while
the lending rate rose from 6% to 10.25% within the same period. (CBN 2012)
2.2 Management of Interest Rates Since 1987
Within the general framework of liberalizing the economy in 1986 to enhance competition and
efficient allocation of resource, the Central Bank of Nigeria introduced a market-based interest
rate policy in August, 1987. The policy decision was not without controversy while it was
generally agreed that low interest rate did not encourage saving, it was feared that high interest
rate, which were likely to accompany liberalization of interest rate, might stifle investment. The
liberalization of interest rates allowed banks to determine their deposit and lending rate
according to market conditions through negotiations with their customers. However, the
Minimum Rediscount Rate (MRR) which influences other interest rate continue to be determined
by the central bank in line with changes in overall economic conditions. The MRR which was
15% in December 1987 was reduced to 12.5% in August 1987 with the objective of stimulating
investment in the economy. During the same period, the saving deposit of commercial banks on
the average was 11.5% and interest rate paid by merchant banks on 90-days fund was 15%. The
prime lending rates of commercial and merchant banks were, on the other average, 18.0% and
20.5% respectively. While their corresponding maximum lending rate were 19.2% and 22.0%.
Following the need to moderate monetary expansion in 1989, the MRR was raised to 13.25%. it
9
was also observed that there were wide disparities in the interest rate structure of the various
banks. (CBN brief 2012). The lack of responsiveness of the structure of deposit and lending rates
to market fundamentals, particularly the decline in inflation in 1990 and the increase in domestic
liquidity, compelled the authorities in 1991 to fix a maximum spread of 4% points between the
cost of funds of commercial and merchant banks, and their maximum lending rates. The banks
were therefore, directed to a maximum lending rate of 21% and the minimum deposit rate of
13.5%. the banking community was highly critical of the new policy measure claiming that it
was against the deregulatory posture of the government. While the reported figures showed that
the rates charged were within the guidelines, there was sufficient evidence that actual rates were
higher.(Acha & Acha 2011). As it were, the benefit of the policy were largely marginal, hence
the ceiling on interest rate were removed in January 1992. Interest rate in 2002 was volatile and
rose to unprecedented level (24.85%).
For the liberalization period, lending was allowed to be determined by market forces and the
interest rates actually increased as envisaged. For instance, the nominal deposit and lending rate
rose from 9.5% and 12% in 1986 to 14% and 19.2% respectively in 1987, as a result of the
interest rate liberalization policy in Nigeria. By 1990, the deposit and lending rate have risen to
18.8% and 27.7% respectively. The government intervened in 1991 and pegged the deposit and
lending rate at 14% and 21% respectively. Also, the deposit and lending rate falls from 2.21%
and 22.51% in 2010 to 1.44% and 22.39% in 2011 respectively. This shows that there is a fall
in investment because depositors are discouraged from saving as a result of the low interest rate
(CBN, 2011). It should be remarked, however, that the changes in interest rate management are
significantly different from what prevailed during the era of regulation. The new policy allows
for a band within which deposit rates can be negotiated, while lending rates are no longer
specified for activity sectors. It also allows room for negotiation up to a limit of 21%per annum.
The 2012 monetary policy circular retains the 2011 interest rate policy measure with indication
that efforts would be made to create an enabling environment for investors to invest in the
economy.(CBN 2012). The implication of the tunnel-like structure of interest rate and low
deposit rate are that savings will likely be discouraged, and this will negatively affect fund
mobilization by banks. This will in turn affect the amount of funds available for investment with
retarded influence on economic growth. On the other hand the high lending rate is detrimental to
productive investment and hence economic growth. As Soyibo & Olayinola (2000) observe,
borrowers with worthwhile investment may be discouraged from seeking loans and the quality of
10
the mix applicants could change adversely. Again, high lending interest rate could create moral
hazard where loan seekers borrow to escape bankrupting rather than invest or finance working
capital. Generally, the behaviour of the interest rate structure is such that there is a wide spread
margin between deposit and lending rates which may encourage speculative financial
transaction.
11
CHAPTER THREE
REVIEW OF RELATED LITERATURE
3.1 Conceptual Framework
Interest rate: According to Keynes, interest rate is the reward for not hoarding but for parting
with liquidity for a specific period of time. Keynes' definition of interest rate focuses more on the
lending rate. Adebiyi (2002) defines interest rate as the return or yield on equity or opportunity
cost of deferring current consumption into future. Some examples of interest rate include the
Saving rate, Lending rates, Treasury bill rate and the Discount rate.
Prof. Learner, in Jhingan (2003), defines interest rate as the price which equates the supply of
credit or saving plus the net increase in the amount of money in the period, to the demand for
credit or investment plus net hoarding in the period. This definition implies that interest rate is
the price of credit which like other prices is determined by the forces of demand and supply of
loanable funds. Apart from this, interest rate can also be categorized as nominal or real. This
categorization credited to Irvin Fisher accommodates the influence of inflation on interest rate.
Nominal interest rate in the observed rate of interest incorporating monetary effects while real
interest rate is arrived at by considering the implication of inflation on nominal interest rate
(Uchendu, 1993, Essia 2005).
Investment: This refers to real capital formation that will produce a stream of goods and
services for present and future consumption (Bannock, Baxter & Rees, 2003). In common terms,
investment is defined as the capital formation in the production. Stiglitz (1993) defines
investment as the acquisition of an asset with the aim of receiving a return. It could also mean
the production of capital goods; goods which are not consumed but instead used in future
production. An example includes building of rail road‟s, or factory. There are several motive for
investment, the basic motive is profit/return. According to Keynes theory, this motive depends
on the expected marginal efficiency of capital (MEC) in relation to the expected rate of interest.
Investment is categories into public and private investment (induced and autonomous). Public
investments are the investment which are being carried out by the government in order to
12
provide social amenities to her citizens such as the provision of electricity, housing, good roads,
and so on. While private investments are carried out by the individuals in the economy, they
source for funds from the financial institutions to establish industries in the economy
3.2 THEORETICAL LITERATURE
3.2.1 Theories of Interest rate
Anyanwu (1995), Jorg, G.H (2002), Rasheed, O.A (2010); and Chris,U.O & Anyingang R.O
(2012) explicated the following interest rate theories: (a) the classical theory, (b) the loanable
funds theory, and (c) the Keynesian theory.
(a) The classical theory of interest rate
The rate of interest according to the classical is determined by the supply and demand for capital.
The supply of capital is governed by the time preference while the demand for capital is
determined by the expected productivity of capital. Time preference and productivity of capital
depend upon waiting or saving. The demand for capital is determined by the investors because it
is productive. While the productivity of capital is subject to the law of variable proportions.
Additional units of capital are not as productive as the earlier units. That is, the rate of interest is
just equal to the marginal productivity of capital and it means that at a higher rate of interest, the
demand for capital is low and it is high at a lower rate of interest. Thus, the demand for capital is
inversely related to the rate of interest and the demand schedule for capital or investment curve
slope downward from left to right. The supply of capital depends on saving, rather than the will
to save and the power to save of the individual or community. Some individuals save irrespective
of the rate of interest. Classical economists are of the view that, the higher the rate of interest, the
larger will be the individual saving and the supply of funds.
(b) The loanable funds theory of interest rate
The neo-classical or the loanable fund theory examines interest rate in terms of demand and
supply of loanble funds or credit. According to this theory, the rate of interest is the price of
credit which is determined by the demand and supply for lonable funds. In the words of Prof
Lerner in Jhingan (1992); it is the price which equates the supply of credit, or saving plus the net
increase in the amount of money in a period, to the demand for credit, or investment plus net
hoarding in the period. The demand for loanble fund has primarily three source; government,
businessmen and consumers who need them for purpose of investment, hoarding and
13
consumption. The government borrows funds for constructing public works or for war
preparations. The businessmen borrow for the purpose of capital goods and for starting
investment projects. Such borrowings are interest elastic and depend mostly on the expected rate
of profit as compared with the interest rates. The demand of loanable fund on the part of
consumers is for the purchase of durable consumer goods like scooters, houses etc. individuals
borrowings are also interest elastic. The tendency to borrow is more at a lower rate of interest at
a higher rate.
(c) Keynes liquidity of preference theory of interest rate
Keynes defines the rate of interest as the reward of not hoarding but the reward for parting with
liquidity further specified period. It is not the price which brings into equilibrium the demand for
resources to invest with the readiness to abstain from consumption. It is the price which
equilibrates the desire to hold wealth in the form of cash with the available quantity of cash. In
other words, the rate of interest in the Keynesian sense is determined by the demand for and the
supply of money. This theory is therefore characterized as the monetary theory of interest as
district from the real theory of the classical.
Supply of money refers to the total quantity of money in the country for all purpose at any time.
Though the supply of money is a function of the rate of interest to a degree, yet it is considered
to be fixed by the monetary authorities. The demand for money according to Keynes is the
liquidity preference by which his theory of interest rate is commonly known. The liquidity
preference is the desire to hold cash. The rate of interest in Keynes word is the premium which
has to be offered to induce people to hold the wealth in some form other than hoarded money.
The higher the liquidity preference, the higher will be rate of interest that will have to be paid to
the holders of cash to induce them to part with their liquid assets. The lower the liquidity
preference, the lower will be the rate of interest that will be paid to cash-holders.
Keynes gives three reasons why individuals and businessmen hold money, which are the
transactions, precautionary and speculative motive. He holds that the transactions and
precautionary motive of holding money has nothing to do with the rate of interest. But the
speculative motive of holding money is to make gain by investing in bonds. Money held for
speculative purposes is a liquid store of value which can be invested at an opportune moment in
interest-bearing bonds or securities. Bonds and the rate of interest are inversely related to each
14
other low bond price are indicative of high interest rates, and high bond price reflect low interest
rates.
(d) The Wicksell theory of interest rate
He examines the relation between the natural interest rate and market interest rate. The natural
interest rate is rate of interest at which the demand for loan capital and supply of savings exactly
agree, and which more or less corresponds to the expected yield on the newly created capital,
will then be the normal or natural real rate. It is the rate consistent with a stable money supply
and stable prices. On the other hand, the market rate of interest is the money prevailing in the
loan market. It is the rate of interest charged by banks or lenders. It depends upon the demand
and supply of money. According to wicksell, the natural rate of interest is essentially variable. It
is partly determined by the demand for loans which, in turn, depends on the expected
profitability of new investment. All factors which affect the expected profitability of investment
bring changes in the natural rate of interest. He pointed out that, the natural rate is not the same
as the market rate. There are disparities between the two rates during the short run which
produce changes in the price level. The market rate of interest tends to be sticky and responds
slowly to changes in the demand for loanable funds. In the long-run, disparities between the two
rates automatically generate forces which bring their equality.(Jhingan, 2010 )
3.2.2 Theories of Investment
Dale, W.J (1967), Jhingan (2010), and Johan, E.E (2013), explicated the following Investment
theories: (a) Accelerator theory, (b) Financial theory (c) Tobin‟s q theory, (d) Neo-classical
theory, (e) Classical theory, and (f) Keynesian theory
(a)The accelerator theory of Investment
The accelerator theory states that an increase in the rate of output of a firm will require a
proportionate increase in the capital stock. The capital stock refers to the desired or optimum
capital stocks, K*. Assuring that capital-output ratio is some fixed constant, V, the optimum
capital stock is a constant proportion of output so that in any period t,
Kt = v Yt
Where Kt is the optimal capital stock in period t, v (the accelerator) is a positive constant, and Yt
is the output in period t.
15
Any change in output will lead to a change in the capital stock, thus;
Kt - Kt-1 = v (Yt - Yt-1)
Int = v (Yt - Yt-1) [Int = Kt - Kt-1]
= v D Yt
Where DYt = Yt - Yt-1 and Int is net investment
This equation represents the naïve accelerator.
In the above equation, the level of net-investment is proportional to change in output. If the level
of output remains constants (Y = 0), net investment would be zero. For net investment to be a
positive constant, output must increase. When output starts declining, net investment becomes
negative. This based on the assumption that, there is symmetrical reaction for increase and
decrease of output.
(b)The financial theory of investment
The theory was developed by James Duesenbery. It is known as the cost of capital theory of
investment. The accelerator theories ignore the role of cost of capital in investment decision by
the firm. They assume that the market rate of interest represents the cost of capital to the firm
which does not change with the amount of investment it makes. It means that unlimited funds are
available to the firm at the market rate of interest. In other words, the supply of funds to the firm
is very elastic. In reality, an unlimited supply of funds is not available to the firm in any time
period at the market rate of interest. As more and more funds are required by it for investment
spending, the cost of funds (rate of interest) rises. To finance investment spending, the firm may
borrow in the market at whatever interest rate funds are available.
(c)Tobin’s q theory
James Tobin has proposed the q theory of investment which links a firm‟s investment decision to
fluctuation in the stock market. When a firm finances it capital for investment by issuing share in
the market, its share prices reflect the investment decisions of the firm. Firm‟s investment
decision depends on the following ratio, called Tobin‟s q
capital ofcost t replacemen
stock capital of uemarket valq
The market value of firm‟s capital stock in the numerator is the value of its capital as determined
by the stock market. The replacement cost of firm‟s capital in the denominator is the actual cost
of existing capital stock if it is purchased at today‟s price. Tobin‟s q theory examines investment
by relating the market value of firm‟s financial assets (the market value of its shares) to the
16
replacement cost of its real capital (share). According to Tobin, net investment would depend on
whether q is greater than 1 (q > 1) or less than 1 (q < 1). If q > 1, the market value of the firm
share in stock market is more than the replacement cost of it real capital, machinery etc. The firm
can buy more capital and issue additional shares in the stock market. In this way, by selling new
shares, the firm can earn profit and finance new investment. Conversely, if q < 1, the market
value of its shares is less than its replacement cost and the firm will not replace capital
(machinery) as it wears out. The theory provides an incentive to invest for firms on the basis of
the stock market. It does not only reflect the current profitability of capital but also its expected
future profitability. Investment is expected to be higher in the future when the value of q is larger
than 1. Tobin‟s q theory of investment induces firms to undertake net investment even when q is
less than 1 in the present. They may adopt such economic policies which brings future
profitability by raising the market value of their shares.
(d) Neo-Classical Theory of Investment
This theory is developed by Jorgenson (1963) and followed by its 1967 and 1971 versions,
combines the users cost of capital and the accelerator effect to explain investment behaviour. In
this model, the firm is assumed to own most of the capital stock and it can either sell the stock or
make use of it. But if the firm uses its stock, some costs are inevitable to be incurrent. The cost
includes the forgone interest income that the firm generates had it sold the stock, the depreciation
cost that comes with time, and the charges in the market value (price) of capital overtime (this
take negative if the value of capital appreciates and positive otherwise). In such model,
investment tax credit.
(e) Classical theory of investment
They regard the rate of invest as the factor which bring the demand for investment and the
willingness to save into equilibrium with one another. Investment represents the demand for
investable resources and saving represents the supply, whilst the rate of interest is the price of
investable resources at which the two equate (investment and saving). Just as the price of a
commodity is necessarily fixed at that point when the demand for it is equal the supply, so the
rate of interest necessarily comes to rest under the amount of investment at that rate of interest.
(f) Keynesian theory of investment
17
The theory emphasised the importance of interest rate in investment decision. But other factors
also enter into the model not least the expected profitability of an investment project. Changes in
interest rate should have an effect on the level of planned investment undertaken by private
sector businesses in the economy. A fall in interest rate should decrease the cost of investment
relative to the potential yield and as result planned capital investment projects on the margin may
become worthwhile. A firm will only invest if the discounted yield exceeds the cost as the
project. The inverse relationship between investment and the rate of interest is represented by
using the marginal efficiency of capital investment (MEC). A fall in the rate of interest causes an
expansion of planned investment. Planned investment can change at each rate of interest. The
MEC is the expected rate of return over cost of new capital goods. In order to find whether it is
worthwhile to purchase capital goods, it is essential to compare the present value of the capital
asset with its cost or supply price (interest rate). If the present value of a capital project exceeds
it cost of buying, it pays to buy it. On the contrary, if its present value is less than it cost, it is not
worthwhile in investing in the capital project.
From the above theories of interest rate and investment, this research work is based on the
Keynesian theory of interest rate and investment. This is because the Keynesian explain the
behaviour of investment toward interest rate, which is in relation to the situation of Nigeria,
when the interest rate is regulated, investment is negative because the rate of interest is very high
but when deregulated, the rate of interest is left into the hands of demand and supply to decide.
3.3 Empirical Literature
Several empirical studies have proved that increased real interest rates raise the quantity and
quality of investment. Such that two channels for the effect have been postulated. First, is that
the higher interest rates increase the availability of domestic credit to finance investment,
although the theory here is hard to distinguish from the effect of interest rate on savings. Second,
that potential channel through McKinnon (1973) hypothesis on the complementarily of money
and capital indicating that investment project are lumpy, and that investors must accumulate their
investment balances in the form of deposits until the required amount of principal is reached.
The study by in Fry (1981a)have shown that credit availability mechanism has been reported for
12 Asian developing countries which showed that the ratio of domestic credit to nominal gross
18
national product (GNP) is positively and significantly related to real interest rates. Fry (1981b)
gives similar results for seven pacific basin developing countries. Fry (1980) found strong
positive and significant relationship between the availability of domestic credit and investment in
a pooled time-series study of 61 developing countries, while Fry (1986) reached similar
conclusion from a study of 14 Asian developing countries. He employs the OLS technique in his
work.
The complementarily hypothesis has been investigated extensively and with conflicting results.
One group of studies tests the hypothesis by including real money balance in investment or
savings functions. A positive and significant co-efficient has been identified, for example by Abe
et al (1975), Fischer (1981), and Jao (1976).
A second group of studies has tested the complementarily hypothesis by including either an
investment variable or a saving variable in demand for money function. Akhtar (1974) rejected
the hypothesis in a study of Pakistan using the investment rate. Similarly, Harries (1979) found
that out of tests our 5 Asian developing countries, only the results for one (Taiwan) supported the
hypothesis. In a test using the saving rate Fry (1978) found a negative and significant coefficient
in a pooled time-series study for 10 Asian developing countries and rejected the hypothesis.
However, in time series tests for India and Nnanna (2001), Thornton (1990), found a positive
and significant coefficient for the savings rate in a demand for money function and a positive and
significant coefficient for the real money balances in a savings function, and concluded that the
complementarily hypothesis was relevant for the poorest developing countries.
Majed & Ahmed (2010) investigate the impact of real interest rate liberalization on investment in
Jordan over the period 1990-2005. the result were found to be in line with the economic theory
and some other studies in the sense that interest rate liberalization has a negative impact on
investment, where it is found that an increase in interest rate by 1% reduces the investment level
by 44% on the other hand the income level has a positive impact.
There have been few studies relating directly to the efficiency of investment. In a study of
Turkey, Fry (1979) found a positive and significant relationship between real interest rates and
the incremental capital-output ratio. A similar result was achieved in a pooled time-series. Study
of 11 Asian developing countries by the Asian Development Bank (1985).
19
Eregha (2010) examined variations in interest rate and investment determination in Nigeria
between the periods of 1970-2002 and deduced that investment has an indirect relationship with
interest rate variation and other variables that he used. These variables such as debt burden,
economic stability, foreign exchange, shortage and lack of infrastructure affect gross investment
and the OLS technique was employed.
Government have attempted to raise private savings through interest rates liberalization. In the
development economic literature, the theory of high interest rate policy was popularized by
McKinnon (1973) and Shaw (1973) who argued that, in countries characterized by financial
repression, raising nominal interest rates relative to inflation would increase saving and the
supply of investable resources in an economy. According to the McKinnon and Shaw doctrine,
financial repression arises mostly when a country imposes ceilings on nominal deposit and
lending interest rates at a low level relative to inflation the resulting low or negative real interest
rates discourage saving mobilization and the channelling of the mobilized saving through the
financial system.
Country and cross-country studies for OECD (Organisation for Economic Cooperation and
Development) countries tend to show that saving is not much influenced by interest rates
(Deaton 1992). Increasing evidence for developing countries (Giovanini, 1983, 1985, Corbo &
Schmidt-Hebbel 1991; Scmidt-Hebbel, Webb & Corsetti 1992) suggests that private savings (or
consumption) typically does not respond to the real interest rates. Edwards (1994) confirms that
insensitivity of private savings to the real interest rate for a cross-country sample of OECD and
developing economies. In those exceptional cases where a positive response of saving to the
interest rates is found (Gupta 1997, Fry 1988), it is quantitatively very small.
There is little evidence that domestic savings in developing countries are interest-elastic (Fitz
Gerald, 1989; Jansey, 1989; Taylor, 1988) and it is widely held that sustained increases in the
real interest rates generally dampens the response of investment expansion. Further, empirical
evidence has shown that a significant portion of the private sectors savings is used to finance
capital flight rather than investment (Fitz Gerald & Sermad, 1990). Hence, they conclude that the
suggestion that the removal of distortions in the savings market will yield higher savings
investment and growth does not coincide with the facts.
20
The findings by Deaton (1992), Giovannini (1983, 1985) Corbo & Schmidt-Hebbel (1992),
Schmidt-Hebbel, Webb & Corsetti (1992) and Edwards (1994) that savings is insensitive to real
interest rates are in direct contradiction to real life experience and empirical evidence in Nigeria.
Soyibo & Adekanye (1992), in their investigation of the relationship between aggregate savings
and real interest rates in Nigeria use OLS regression model but in a log form and find aggregate
savings to be positively and significantly correlated with real interest rates.
Turtelboom (1991) has provided reasons for one to be sceptical about the impact of interest rates
on saving in Africa. He examines the experience of five African countries (Gambia, Ghana,
Kenya, Malawi, and Nigeria) with interest rate liberalization. It was revealed that despite
substantial progress made in reforming their financial systems, liberalization only partially
affected the level and variability of interest rate in these countries. This behaviour of interest
rates was attributed to the underdevelopment of financial markets and the oligopolistic structure
of the banking industry which kept interest rate spreads wide through the collusive behaviour of
the dominating banks.
Fry (1978) found that although higher interest rate in Nepal following liberalization triggered a
change in the composition of many stock-currency fell relative to deposits; there was a sharp
contraction in both private sector demand for credit and the volume of investment. However,
using pooled time-series data to estimate national savings functions for fourteen (14) Asian
developing countries, Fry (1988) found that the real deposit rate of interest exerts a positive and
significant effect on national savings.
Giovannini (1983) estimated regressions similar to Fry‟s (1988), coming up with contrasting
results, using data from the 1960s and 1970s for seven Asian countries, he found no real interest
rate effect on savings. On the argument that traditional savings equation may not reveal the
response of aggregate saving to the interest rate, Giovannini (1985) supplement Keynesian type
saving functions with estimates of the inter-temporal elasticity of substitution in consumption.
Using annual data for 18 developing countries, it was found that only in 5 cases did consumption
respond significantly to changes in interest rates.
21
Since the seminar work by McKinnon (1973) and Shaw (1973), there has been a considerable
amount of empirical research into the workings of financially repressed economies and the
beneficial effects of financial liberalization. The McKinnon-Shaw claim is that a repressed
financial system interferes with development in a number of ways: saving vehicles are
underdeveloped and/or the return on savings is negative or unstable; financial intermediaries that
collect savings do not allocate them efficiently among competing uses, and firms are discouraged
from investing because poor financial policies reduce the returns to investment or make them
excessively unstable. In contrast, liberalization on the financial sector from interest rate ceiling
and other restrictions facilitate economic development and growth because higher interest rates
lead to increased savings and a more efficient allocation of capital. The empirical proposition is
that increased real interest rate promotes economic growth. In a model which captured interest
rates on economic growth in 7 Asian countries, Fry (1980) concludes that around half a
percentage point in economic growth was foregone for everyone percentage point by which the
real rate of interest is set below its equilibrium level. The Lanyi & Saracoglu (1983) study also
found a positive and significant relationship between interest rate and the rate of growth of real
GDP.
Phylaktis (1997) however notes that despite the trauma associated with liberalization, by the
early 1990s, Chile was at the most advanced stage in the process compared to other Latin
American countries and was poised to resume sustainable growth. Nominal and real interest rates
were however at high level despite substantial capital inflows, as the demand for credit remained
high.
Robert and Ross (1992) demonstrate that 119 countries sampled, both developed and developing
countries with average real interest rate below -0.5 over the 1974-1989 period tended to grow
more slowly than countries with average real interest rates greater than -0.5. This generally
supports the findings of Gelb (1989), Easterly (1990); and Roubini & Sala-Martin (1991) that
severely repressed interest rates are associated with slow growing countries. Furthermore, Robert
& Ross (1992) find that countries with severely depressed interest rates tend to have low
investment rates and low efficiency of investment measures. Less favourable results have been
found in other studies however. A paper by Khatkhate (1988) found no difference in average real
GDP growth rate between countries having below average and above-average real interest rates
in a sample of 64 developing countries. In addition, Gupta (1984) found conflicting results in
22
two studies. Thus, the Gupta cross-section study of 25 Asian and Latin American countries
found an unfavourable effect of higher interest rates on the rate of economic growth. In a study
of India and Korea, however, Gupta found evidence that higher real interest rate raised
economic growth (John Thornton 1991).
Fry (1988) stated that interest rate liberalization increase the supply and allocation of resources
for investment. Financial intermediation was found to have an affirmative shock on economic
growth for a sample of 74 countries Levine and Beck (2000). Similarly, Bekaert & Harvey
(2001) found that interest rate liberalization contributing 30% to the process of economic
growth. Mattoo et al (2006) found interest rate liberalization having an affirmative and
momentous effect on economic growth in a sample of 59 countries. Ozdemir & Erbril (2008)
empirically investigated the impact of interest rate liberalization on economic growth in 10 new
European Union countries and Turkey between 1995 and 2007. Their findings take cognizance
of interest rate liberalization as a policy tool because of its possibility to promote economic
growth.
Asamoah (2008) assessed the interest rate liberalization and its impact on saving, investment,
and the growth of GDP in Ghana. The empirical estimation of 42 observations that is, January
2000 to June 2003 was evaluated using OLS and the result show that the rise in interest rate
over the years after liberalization has led to a corresponding increase in saving which has a
positive impact on the growth of GDP.
Obamuyi (2009) studied the relationship between interest rate and economic growth in Nigeria.
The study employed co integration and error correction modelling techniques and reveal that
lending rate has significant effect on economic growth. The study then postulated that
investment friendly interest rate policies necessary for promoting economic growth needs to be
formulated and properly implemented. Akintoye & Olowlaju (2008) examine optimum
macroeconomic investment decision in Nigeria. The study employed OLS and VAR framework
to stimulate and project inter-temporarily private investment response to its principal shock
namely public investment, domestic credit and output shock. The study found low interest rate to
have constrained investment growth. The study resolve that only government policies produce
sustainable output, steady public investment and encourage domestic credit to the private sector
will promote private investment. Obute, C. et al (2012) assess the impact of interest rate
23
deregulation on economic growth of Nigeria, their findings reveal that real deposit rate has no
significant impact on saving before and after deregulation (liberalization); and also, real lending
rate has no significant impact on investment before and after liberalization but that investment
has a positive and significant impact on economic growth.
Onwumere, Okore & Imo (2012) were of the view that interest rate liberalization causes interest
rate to rise, thereby increasing saving and investment. It covers the period 1976 to 1999 and
adopts OLS technique using SPSS statistical software. The study reveals that interest rate
liberalization has a negative significant impact on investment in Nigeria; only real lending rate
was use in the estimation of investment. Thus, interest rate liberalization, though a good policy,
was counterproductive in Nigeria. This might be as a result of improper pace and sequencing.
The result did not give room for comparative analysis of what happen during the pre-
liberalization and post –liberalization periods.
Akiri & Adofu (2007); investigate the effect of interest rate deregulation on investment in
Nigeria between 1986-2002 and uses OLS regression model to authenticate the proficiency of
interest rate deregulation on gross domestic investment in Nigeria. The study also identified
other factors which impede investment in Nigeria namely, political instability, exchange rate
inflation rate, unawareness of investment opportunities and corruption in other to bring out the
level of influence of exchange rate and inflation rate into investment.
Chuba (2005) investigate the validity of the proposition that the high interest rate observed
during the era of post liberalization of interest rate have been frequently blamed for the
investment contraction in Nigeria. The study makes use of descriptive and analytical tools, the
finding shows that real lending rate have a negative but insignificant impact on gross domestic
investment (GDI) and that interest rate liberalization does not have negative impact on GDI as
usually claimed.
3.4 Limitations of Previous Studies
From the empirical review above, it is clear that, the previous literature have been done to
investigate the impact of Interest rate liberalization on savings and investment in Nigeria. For
instance the work of Akiri & Adofu (2007) uses real lending rate, exchange rate and inflationary
rate to estimate the behaviour of interest rate deregulation towards investment by using OLS but
24
fail to do a comparative analysis. Chuba (2005) uses gross domestic product, real lending rate
and foreign capital to estimate the interest rate policy and investment behaviour in Nigeria
between 1973-2002. Furthermore, Onwumere, Okore & Imo (2012) estimate the impact of
interest rate liberalization on savings and investment in Nigeria by using real lending rate to
estimate the investment function but fail to do an indebt comparative analysis of what happen
during the pre-liberalization and post-liberalization regime. None of the works clearly compare
the periods before and after liberalizations to show if really interest rate liberalization has any
impact on investment. This work therefore departed from other works by comparing the two
periods to establish the impact of interest rate liberalization on investment and to test for the
structural break. In addition, this work include market capitalization rate to show the amount of
capital available to investors.
25
CHAPTER FOUR
METHODOLOGY
4.1 Theoretical Framework
The framework for the analysis is based on the Financial Liberalization Theory put forth by
McKinnon (1973) and Shaw (1973) which postulates that financial liberalization in financially
repressed developing countries would induce higher savings, especially financial savings,
increase credit supply, stimulate investment and hence help to boost economic growth. They
both claim that interest rate regulations usually lead to low and sometimes negative real interest
rates, which is the cause of unsatisfactory growth performance of developing countries. They
claim that financial repression through interest rates ceiling keeps real interest rates low and thus
discourages savings and consequently, stifles investment. Thus investment is constrained as a
result of low savings resulting from financial repression. The quality of investment will also be
low because the projects that would be undertaken under a regime of repression would have a
low rate of yield. With interest rate deregulation, real interest rates would rise thereby increasing
both savings and investment. The increased investment results in the rationing out of low-
yielding projects and subsequent undertaking of high-yielding projects would therefore boost
economic growth.
Though both Mackinnon and Shaw advocated that interest rates deregulation was needed to
remedy the problems caused by financial repressive policy of developing countries as established
by Kar and Pentecost (2001). They further assert that the implication of the theory is that the
demand for real money balances (M/P) depends positively upon real income, Y, the own real rate
of interest on bank deposits, R, and the real average return on capital, r. Critically, the positive
association between the average real return on capital and the demand for money balances
represents the complementarity between capital and money. This, however, is only one leg of the
complementarity hypothesis.
According to McKinnon, the investment ratio, I/Y, must also be positively related, inter alia, to
the real rate of return on money balances. This is because a rise in the real return on bank
26
deposits, R, if it raises the demand for money and real money balances are complementary to
investment, it must also lead to a rise in the investment ratio. The researcher hereby adopts this
theory as the main theoretical framework of this research and following Bouzid (2012), the
McKinnon-Shaw theory therefore gives a demand for money function and a demand for
investment function as:
, ,m i
f y dp y
…………………………………………..1
Equation (1) is the standard long-run real money demand function.
With Y = Real income
i
y = Investment rate
d
= Real interest rate
d = Nominal interest rate
= Anticipated inflation rate
])(
)(
Y
P
M
: represents the money demand for transaction. An increase in the income generates
a strong monetary detention.
]
)(
)(
Y
I
P
M
: This partial derivative represents the money demand for investment. An increase in
investment rate allows a strong money detention. In other words, the investment increases the
monetary saving. It is an important condition of success of financial reform policies for the
transmission of the investment to the saving.
])-d(
)(
a
P
M
A positive real interest rate allows a greater money demand. However,
McKinnon complementary theory appears in the following investment function:
,i
f r dy
…………………………………………………2
Equation (2) is an investment function.
27
r: the physical capital average current rate.
])(
)(
r
Y
I
and ])-d(
)(
a
Y
I
Thus, the complementarity‟s theory seen in the partial derivatives following:
]
)(
)(
Y
I
P
M
........................................................................................................3
])-d(
)(
a
Y
I
....................................................................................................4
Equations (3) and (4) suggest that it is not the cost of capital but the availability of finance that
constrains investment in financially repressed economies. When the real deposit rate increases,
investment increases as well because the financial constraint is relaxed. However, the traditional
theory suggests the reverse, that is, that an increase in interest rate reduces investment.
For Shaw, the investment (I) is a decreasing function of real interest rate (r) and the saving is an
increasing function of investment rate (g) and real interest rate (r). The above investment and
saving functions are express as:
I I r 0)(
)(
r
I
.................................5
,S S r g 0)(
)(
r
S
0
)(
)(
g
S
........6
4.2 Model Specification
Based on the framework above and following the Obamuyi (2009) approach in estimating the
relationship between interest rate and economic growth in the regulated and deregulated era in
Nigeria. The functional form of the model is specified thus:
Invt =f(ir, mkcp, pubexp, trop,)..........................................................................7
where;
invt = proxy for Gross Domestic Investment;
i r = Interest Rate;
mkcp =Market Capitalization Rate;
exppub = Public Expenditure;
28
trop = Trade openness
MODEL 1:
To estimate objective one which is to examine the impact of interest rate on investment in
Nigeria, equation (7) is rewritten in an econometric form thus:
∆ invtt = α0 + α1∆irt + α2∆mkcpt + α3∆pubexpt + α4∆tropt + µt………………….8
where
αo = the intercept of the model
α1..α4 = the slope coefficient of explanatory variable
∆ = refers to a first difference
µt = error term
ir, mkcp, pubexp and trop are already being explained above.
MODEL 2:
To estimate objective two, which is to determine the differential impact of interest rate
liberalization on investment in Nigeria during the pre and post liberalization regimes, the study
transform equation 7 with the introduction of dummy variables as specified below:
Invtt = λ0 + λ1irt + λ2mkcpt + λ3pubexpt + λ4tropt + ψ0di + ψ1 diirt + ψ2 dimkcpt +
ψ3dipubexpt + ψ4ditropt + µt .......................................................................................9
where;
di = (Dummy variable to control for changes in the pre and post liberalization regimes, (1987-
2012=1, and 0 otherwise) ;
λ0 and ψ0 = the intercept of the model
λ1.... λ4 and ψ1 and ψ4 = the slope coefficient of explanatory variable.
All other variables as defined above.
MODEL 3
In order to estimate Objective three which is to examine the structural responses of investment to
changes in interest rate in Nigeria, Vector Autoregression(VAR) estimation technique is
employed. The specification is as follows:
29
𝑖𝑛𝑣𝑡𝑡 = 𝛼0 + 𝛼1 𝑖𝑛𝑣𝑡𝑡−𝑖 +
𝑘
𝑗=𝑖
𝛼2 𝑖𝑟𝑡−𝑖 + 𝛼3 𝑚𝑘𝑐𝑝𝑡−𝑖 + 𝛼4 𝑝𝑢𝑏𝑒𝑥𝑝𝑡−𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
+ 𝛼5 𝑡𝑟𝑜𝑝𝑡−𝑖
𝑘
𝑗=𝑖
+ 𝜇𝑡 ………………………………………………………… 10
𝑖𝑟𝑡 = 𝛿0 + 𝛿1 𝑖𝑛𝑣𝑡𝑡−𝑖
𝑘
𝑗=𝑖
+ 𝛿2 𝑖𝑟𝑡−𝑖 + 𝛿3 𝑚𝑘𝑐𝑝𝑡−𝑖 + 𝛿4 𝑝𝑢𝑏𝑒𝑥𝑝𝑡−𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
+ 𝛿5 𝑡𝑟𝑜𝑝𝑡−𝑖
𝑘
𝑗=𝑖
+ 휀𝑡 …………………………………………………………11
𝑚𝑘𝑐𝑝𝑡 = 𝛽0 + 𝛽1 𝑖𝑛𝑣𝑡𝑡−𝑖 +
𝑘
𝑗=𝑖
𝛽2 𝑖𝑟𝑡−𝑖 + 𝛽3 𝑚𝑘𝑐𝑝𝑡−𝑖 + 𝛽4 𝑝𝑢𝑏𝑒𝑥𝑝𝑡−𝑖
𝑘
𝑗=1
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
+ 𝛽5 𝑡𝑟𝑜𝑝𝑡−𝑖
𝑘
𝑗=1
+ 𝜑𝑡 ………………………………………………………… 12
𝑝𝑢𝑏𝑒𝑥𝑝𝑡 = 𝛾0 + 𝛾1 𝑖𝑛𝑣𝑡𝑡−𝑖
𝑘
𝑗=𝑖
+ 𝛾2 𝑖𝑟𝑡−𝑖 + 𝛾3 𝑚𝑘𝑐𝑝𝑡−1 + 𝛾4 𝑝𝑢𝑏𝑒𝑥𝑝𝑡−𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
+ 𝛾5 𝑡𝑟𝑜𝑝𝑡−𝑖
𝑘
𝑗=𝑖
+ 𝜌𝑡 ………………………………………………………… 13
𝑡𝑟𝑜𝑝𝑡 = 𝜃0 + 𝜃1 𝑖𝑛𝑣𝑡𝑡−𝑖
𝑘
𝑗=𝑖
+ 𝜃2 𝑖𝑟𝑡−𝑖 + 𝜃3 𝑚𝑘𝑐𝑝𝑡−𝑖 + 𝜃4 𝑝𝑢𝑏𝑒𝑥𝑝𝑡−𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=𝑖
𝑘
𝑗=1
+ 𝜃5 𝑡𝑟𝑜𝑝𝑡−𝑖
𝑘
𝑗=𝑖
+∞𝑡 ………………………………………………………… 14
where:
All the variables are as defined above
k = lag order/length
𝛼, 𝛿,𝛽, 𝛾,𝜃, = parameters
𝜇, 휀,𝜑, 𝜌,∞, = structural innovations (error term)
4.3. Method of Estimation
In order to estimate objective one and two, the study uses multiple regression and employs
ordinary least squares (OLS) estimation technique. The OLS technique is favoured because of its
BLUE property. The OLS estimator is said to be Best Linear Unbiased Estimator (BLUE) in the
class of all available estimators if the following assumptions are satisfied:
1. It is linear, that is, a linear function of a random variable, such as the dependent variable,
Y in a regression model.
2. It is unbiased, that is, its average or expected value E(âi) is equal to the true value ai.
3. It has minimum variance in the class of all such linear unbiased estimators; an unbiased
estimator with the least variance is known as an efficient estimator.
30
However, there is no guarantee that economic time series (variables) will always satisfy these
assumptions and so the estimation shall proceed as follow. First the models shall be estimated,
after which the variance inflation factors (VIF) shall be examined for linear relationship among
the explanatory variables.
To estimate objective two, dummy variable technique is employ to determine the differential
impact of interest rate liberalization on investment during the pre and post liberalization regime.
The dummy technique provides valuable information about the existence of a regime.
To estimate objective three, VAR estimation technique is employed. Before the VAR equations
are estimated, the maximum lag length will be selected. This is to avoid degree of freedom
problem and the possibility of introducing multicollinearity, as well as specification errors. For
the selection of the maximum lag length, the Akaike information criterion (AIC) and the
Schwartz Bayesian information Criterion (SBIC) are chosen. Of the two criterions, the Bayesian
approach is especially attractive (that is, preferable). SVARs are proliferative parameterized.
The study shall also examine the time series properties of the data by checking the stationarity
properties of the data and the evidence of cointegration. It shall also employ Zivot and
Andrews‟s unit roots tests which are more robust in the presence of structural breaks
Impulse responses and variances decompositions shall be used to interpret the model results
since the VAR coefficients are not directly interpretable. In order to ensure that the results are
reliable, the study shall conduct diagnostics tests such as eigen-value stability test, normality and
autocorrelation tests, lag exclusion tests, and portmanteau tests. It is when the basic tests, such as
the stability tests, are satisfied that the impulse response functions and variance decompositions
will have meaningful interpretation.
4.4 Justification of the Model
In this study, which aim at analysing the impact of interest rate liberalization on investment in
Nigeria has been before the regime of interest rate deregulation and after the regime. And with
the motivation to investigates the interest rate deregulation and investment relationship by taking
into consideration the transmission mechanism through which interest rate affect investment.
Therefore, borrow from the methodology of the Mckinnon complementarity hypothesis by
adopting the impulse responses and variances decompositions to pursue the established research
objectives given the well acknowledge frictions in the literature.
31
Having established these, the motivations for this methodology is the findings in the literatures
that indicate nature of the model to advance efficiency in estimation by combining information
on both the real money demand and investment equations.
The second motivation is to impose and/or test restrictions that involve parameters in different
equations. The model uses several variables, such as inflation rate, gross fixed capital formation
and political stability proxy by corruption perception index and market capitalization rate
designed to measure the cross correlations of interest rate, and trade openness.
4.5 Source of data
The study employed secondary data collected from the following sources: The Central Bank of
Nigeria Statistical Bulletin (2012), The National Bureau of Statistics Bulletin (2012) and Central
Bank of Nigeria Annual Report and Statement of Accounts. The study will employ the
Statistics/Data Analysis software (Eview 7.0) for the estimation of the various models
32
CHAPTER FIVE
PRESENTATION AND ANALYSIS OF RESULTS
5.1 DESCRIPTIVE ANALYSIS OF VARIABLES
Table1 below shows the descriptive statistics of the variables used in the analysis. According to
the table, the mean value of investment (LOG_INVT) in the period was 29.296, and that of
interest rate (IR) was 15.11 which range from 6.00 to 31.65 with a standard deviation of 6.62.
Also, the market capitalization (LOG_MKCP) ranges from 21.659 to 30.326 with a mean and
standard deviation of 24.975 and 2.996 respectively. More so, the logarithm value of public
expenditure (LOG_PUBEXP) has the minimum value of 19.32 with a maximum value of 28.978.
The trade openness (TROP) ranges from 0.072 to 30.045 with the mean of 6.284 and standard
deviation of 8.605 respectively.
Table 1: Descriptive table
LOG_INVT IR LOG_MKCP LOG_PUBEXP TROP
Mean 29.29575 15.11112 24.97493 24.51328 6.283531
Median 29.00264 16.79250 23.86310 24.01998 0.795171
Maximum 31.08487 31.65000 30.32571 28.97778 30.04527
Minimum 27.99502 6.000000 21.65936 19.32679 0.072361
Std. Dev. 0.918081 6.623125 2.995657 2.787700 8.605110
Observations 43 43 43 43 43
Source: E-Views Output (2015)
Figure below shows the trends of the variables used in the regression analysis. It is shown that
the investment returns fell sharply in the initial period of pre liberalization regimes after which
the fall has been gradual and it began to gradually rise from 2005. Interest rate was low prior to
the 1986 (SAP period) after which it began to rise sharply, reaching its peak between 1990 to
33
1995, but is now falling in the recent period. Public Expenditure and Market capitalization were
low at the early years and began to rise sharply around the year 2000.
5.2 PRE-DIAGNOSTIC TESTS
5.2.1 Unit Root Test Result
The time series behaviour of each of the series is presented in Tables 4.2 and 4.3 below, using
the ADF and P – P tests at both level and first difference of the series. The computer output is
presented in appendix B, but these have been extracted into the two tables below.
0.0E+00
4.0E+12
8.0E+12
1.2E+13
1.6E+13
2.0E+13
2.4E+13
2.8E+13
3.2E+13
1970 1975 1980 1985 1990 1995 2000 2005 2010
INVT
4
8
12
16
20
24
28
32
1970 1975 1980 1985 1990 1995 2000 2005 2010
IR
0.00E+00
2.50E+12
5.00E+12
7.50E+12
1.00E+13
1.25E+13
1.50E+13
1970 1975 1980 1985 1990 1995 2000 2005 2010
MKCP
0
1,000,000
2,000,000
3,000,000
4,000,000
1970 1975 1980 1985 1990 1995 2000 2005 2010
PUBEXP
0
4
8
12
16
20
24
28
32
1970 1975 1980 1985 1990 1995 2000 2005 2010
TROP
34
The ADF test results presented in table 4.2 shows that all the variables are non-stationary at level
which are cointegrated at the order of 1 except for investment which is cointegrated at order 2.
This justifies the number of times they are to be differenced to achieve stationarity.
Table 4.3 of the Phillip Perron test depicts that all the variables are homogenous of order one.
Therefore, they are made stationary by first difference prior to subsequent estimations to forestall
spurious regressions.
Table 2: Augmented Dickey Fuller (ADF) Test
LEVEL FIRST DIFFERENCE Order of
Cointegration
Interpretation
Variables Intercept Trend Intercept Trend
LOG(INVT) -2.2746
(0.1849)
-1.4980
(0.8133)
-1.8400
(0.3563)
-2.5652
(0.2973)
I(2) Non-Stationary
IR -1.6689
(0.4393)
-1.7546
(0.7086)
-7.1624
(0.0000)
-7.1592
(0.0000)
I(1) Non-Stationary
LOG(MKCP) 1.5474
(0.9992)
-1.8163
(0.6790)
-4.6257
(0.0006)
-4.9907
(0.0012)
I(1) Non-Stationary
LOG(PUBEXP) -0.6267
(0.8534)
-2.3019
(0.4235)
-4.3538
(0.0013)
-4.2976
(0.0078)
I(1) Non-Stationary
TROP 3.5640
(1.0000)
2.6939
(1.0000)
-7.1896
(0.0000)
-7.7509
(0.0000)
I(1) Non-Stationary
Source: Authors’ Computation (2015)
Table 3: Phillip-Perron (PP) Test
LEVEL FIRST DIFFERENCE Order of
Cointegration
Interpretation
Variables Intercept Trend Intercept Trend
LOG(INVT) -1.9754
(0.2961)
-0.7129
(0.9654)
-4.8040
(0.0003)
-5.4622
(0.0003)
I(1) Non-Stationary
IR -1.6309
(0.4583)
-1.8171
(0.6786)
-7.1770
(0.0000)
-7.1852
(0.0000)
I(1) Non-Stationary
LOG(MKCP) 1.3352
(0.9984)
-1.8163
(0.6790)
-4.6419
(0.0005)
-5.0135
(0.0011)
I(1) Non-Stationary
LOG(PUBEXP) -1.0296
(0.7340)
-2.0924
(0.5349)
-4.1748
(0.0021)
-4.1109
(0.0125)
I(1) Non-Stationary
TROP 1.0761
(0.9967)
-1.0667
(0.9227)
-7.1953
(0.0000)
-10.0520
(0.0000)
I(1) Non-Stationary
Source: Authors’ Computation (2015)
5.2.2. Co-integration Test
The results of the co-integration tests are extracted into the table below. The computer output is
contained in appendix C. The table shows that the variables converge in the long run, thereby
depicting the existence of long run relationship among the variables. The long run relationship
35
exists at 5% level of significance according to the Trace test statistics and the Eigen value. There
exists three (3) co-integrating relationship among the variables based on the Trace statistics
result and two (2) co-integrating vectors among the variables based on the Eigen value. Since the
variables are co-integrated, there is, therefore, a long run relationship among the variables. It
means that the study can proceed to estimating the Error Correction Model.
Table 4: Co-Integration Testing
No. of
CE(s)
Eigen
value
Trace
Statistic
0.05
Critical
Value
Prob.** No. of
CE(s)
Eigen
value Max Eigen
0.05 Critical
Value Prob.**
None * 0.7080 114.504
0 69.8189 0.0000 None * 0.7080 48.0036 33.87687 0.0006
At most 1 * 0.6058 66.5004 47.8561 0.0004 At most 1 * 0.6058 36.3056 27.58434 0.0030
At most 2 * 0.3837 30.1948 29.7971 0.0450 At most 2 0.3837 18.8783 21.13162 0.1004
At most 3 0.2495 11.3166 15.4947 0.1928 At most 3 0.2495 11.1941 14.26460 0.1448
At most 4 0.0031 0.1225 3.8415 0.7263 At most 4 0.0031 0.1225 3.841466 0.7263
Source: Authors’ Computation (2015) Trace and Max-eigenvalue test indicates 2 cointegratingeqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
5.3 PRESENTATIONS OF REGRESSION RESULTS AND INTERPRETATION
The results of the regressions for the various models are presented below. In the models, the
dependent variable is investment, while the independent variables are interest rate, market
capitalisation rate, public expenditure and trade openness. The results of the error correction
model and innovation accounting (variance decomposition and impulse response) that will guide
our interpretation are as follows:
5.3.1 Error Correction Model
The Error Correction Modelling involves three steps. The first is to estimate a long-run model;
the second is to include the error term from the long model in a dynamic over-parameterised
model and the third is to work on this model until one obtains the parsimonious model which is
then interpreted. The results of the long run models and over-parameterised models are contained
in appendix C and D respectively. What are normally interpreted are the parsimonious results
which are given below. Therefore, based on the result from tables 4, an over-parameterised
model was estimated. Every variable was set at 3 lag. The parsimonious interaction involves
36
dropping insignificant variables. Therefore, the size of the model was reduced by imposing zero
coefficients on those lags where„t‟ statistic is low.
The parsimonious result is shown in the table below. According to the result, R2 value of 0.806
shows that all the variables can explain about 80.6% of investment. F-statistic of 7.128 (P<0.05)
shows that they are jointly significant and the Durbin Watson value of 2.017 implies that the
model does not suffer from autocorrelation problem. The ECM has the correct sign of negative
meaning that about 20.4% of the errors are corrected yearly. Precisely, this speed of adjustment
shows that about 20.4% percent of errors generated in each period is automatically corrected by
the system in the subsequent period and is statistically significant.
In terms of the significance of the individual variables, it is observed that all the variables were
significant. This implies that they are the significant determinants of investment in Nigeria.
Precisely, the results show that both current and past period public expenditure has positive
effect on investment. The first, second and third lags of market capitalisation rate are significant
and are positively related to investment. Also, both first and third lags of interest rate are
significant and positively related to investment at 1% and 5% level respectively. Finally, both
second and third lags of trade openness are significant and positively related to investment at
10% and 5% level respectively.
The result shows that period dummy of pre and post liberalization regimes with a value of -0.074
and standard error of 0.102 is not significant, implying that the impact of interest rate
liberalization on investment is not justified by the pre or post liberalization regimes. Hence, there
is no differential impact of interest rate liberalization on investment in Nigeria during the pre and
post-liberalization regimes.
Table 5: Error Correction Mechanism (ECM) Result
Dependent Variable: D(INVT)
Variable Coefficient
D(PUBEXP) 0.127(0.09)
D(INVT(-1)) 0.549***(0.162)
D(IR(-1)) 0.017**(0.008)
D(MKCP(-1)) -0.099(0.106)
D(INVT(-2)) -0.461***(0.15)
D(MKCP(-2)) 0.3**(0.121)
D(PUBEXP(-2)) 0.24**(0.111)
37
D(TROP(-2)) 0.03*(0.016)
D(INVT(-3)) 0.626***(0.141)
D(IR(-3)) 0.028***(0.009)
D(MKCP(-3)) -0.125(0.129)
D(TROP(-3)) 0.059**(0.021)
ECM(-1) -0.204**(0.078)
PERIOD_DUMMY -0.074(0.102)
C -0.117(0.076) R-Squared 0.8061 Adjusted R-Squared 0.6930 F-Statistics 7.1284 (0.000) Durbin Watson 2.0167
Source: Authors’ Computation (2015)
Note: *, **, *** represents significance level of 10%, 5% and 1% respectively and Standard error in
parenthesis.
5.3.2 INNOVATION ACCOUNTING
This section presents the results of the impulse response function and the variance decomposition
that will aid the interpretation of the structural responses of investment to changes in interest rate
in Nigeria overtime.
The results of the variance decomposition and impulse response function of variables considered
in this study, using the cholesky - dof ordering are presented here. Explicitly the result shows the
effect of one standard deviation shock or innovation on self and other variables. Specifically,
period 1 of the table indicates that a shock to INVT causes a positive standard deviation value of
100.00 in INVT (own shock). The table also shows that INVT does not respond to innovations
from IR, MKCP, PUBEXP and TROP in period 1. Period 2 shows a standard deviation value of
97.23 in INVT resulting from own shock, 2.44 to a response to a shock from IR, 0.0186 to a
response from MKCP, 0.205900 to a response to public expenditure and 0.101933 to response to
trade openness.
In period 10, INVT responds positively with a standard deviation of 18.77 originated from own
shock and standard deviation values of 8.05, 7.94, 12.43 and 15.59 arising from a shock from IR,
MKCP, PUBEXP and TROP respectively. Furthermore, IR responds positively to shocks from
INVT and own shock in period 1 with standard deviation values of 4.591 and 4.591 respectively.
The standard deviation values of 4.903 and 8.623 indicate positive responses in IR due to shock
from INVT and own shock in Period 2. In the long run, IR respond positively to innovations
38
from INVT, own shock, market capitalization, public expenditure and trade openness in period
10 with standard deviations of 15.2359, 15.4114, 5.03372, 6.88330 and9.98708 respectively.
For the impulse response function, the results show that a one-period standard deviation shock to
IR, MKCP, PUBEXP and TROP do not have significant impact on INVT. However, a one-
period standard deviation shock to INVT marginally appreciates IR by less than 1 percent in 2
years before depreciating. A one-period shock to INVT does not have significant impact on
MKCP, PUBEXP and TROP.
Table 6: Variance Decomposition of Investment Result
Period INVT IR MKCP PUBEXP TROP
1 100.00 (0.00) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00)
2 97.23 (6.14) 2.44 (5.27) 0.02 (1.94) 0.21 (1.52) 0.10 (1.82)
10 62.60 (18.70) 2.84 (8.05) 8.30 (7.94) 11.11 (12.43) 15.16 (15.59)
Source: Authors’ Computation (2015)
Table 7: Variance Decomposition of Interest Rate Result
Period INVT IR MKCP PUBEXP TROP
1 2.25 (4.59) 97.75 (4.59) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00)
2 2.93 (4.90) 90.74 (8.62) 0.34 (3.23) 5.57 (6.46) 0.42 (2.73)
10 32.97 (15.24) 58.27 (15.41) 1.07 (5.03) 6.45 (6.88) 1.24 (9.99)
Source: Authors’ Computation (2015)
5.4 EVALUATION OF RESEARCH HYPOTHESES
Having subjected these models to various economic, statistical and econometric tests, the study
hereby presents the conclusions on the hypotheses stated in section 1.5 as evaluated thus:
5.4.1 Test of Working Hypothesis I
The hypothesis of this study can be evaluated from the results of our model.
As evident in the result of the study in append C, the p-value for interest rate is 0.0486 which
was less than 0.05 at 95% confidence interval. Also, other control variables such as public
expenditure, market capitalisation rate and trade openness have significant impact on investment.
39
The t-values of all the independent variables are statistically significant. This implies that interest
rate in addition to other control variables do really have significant impact on investment in
Nigeria. The F-statistic of the model is highly statistically significant which indicates that the
overall performance of the model is pretty significant.
For the first hypothesis, we reject the null hypothesis that there is no
significant impact of interest rate on investment in Nigeria and accept
the alternative hypothesis.
5.4.2 Test of Working Hypothesis II
Furthermore, the regression results obtained provide the basis for testing the second hypothesis.
As the regression result shows, the probability value of the dummy is 0.4756 which is greater
than 0. 05 and the standard error is 0.102. On the basis of this, there exists no differential impact
of interest rate liberalization on investment in Nigeria during the pre and post-liberalization
regimes.
For the second hypothesis, we accept the null hypothesis that there is no differential impact of
interest rate liberalization on investment in Nigeria during the pre and post-liberalization
regime in Nigeria and reject the alternative hypothesis.
5.4.3 Test of Working Hypothesis III
The results of the innovation accounting show that after period one, INVT responds positively
from shocks arising from IR, MKCP, PUBEXP and TROP respectively.
For the third hypothesis, we reject the null hypothesis that there are no structural responses of
investment to changes in interest rate in Nigeria overtime and accept the alternative
hypothesis.
5.5 CHAPTER SUMMARY AND PROSPECTS
40
In this chapter, the regression results of the postulated models were presented. These results were
economically interpreted, statistically analysed and econometrically evaluated. The various tests
carried out all confirmed the robustness and reliability of the regression results of the model. We
finally evaluated the working hypotheses of this study based on the results obtained. We reject
the null hypotheses one and three, but accept the null hypothesis two. The implications of these
results are that interest rate impacts on investment in Nigeria and also investment responds
positively to changes in interest rate overtime. However, there exists no differential impact of
interest rate liberalization on investment in Nigeria during the pre and post-liberalization
regimes. We shall dedicate the next chapter to the summarize f all the findings of this research
work, proffer policy prescription and finally make conclusion.
41
CHAPTER SIX
CONCLUSION AND POLICY RECOMMENDATIONS
6.1 SUMMARY OF RESEARCH FINDINGS
This research work investigated the impact of interest rate liberalisation on investment in
Nigeria from 1970 to 2012. Thus, the study modelled investment against interest rate and other
control variables such as public expenditure, market capitalisation rate and trade openness to
establish a long run relationship among the variables. It further used the Error Correction Model
(ECM) and innovation accounting technique to test the objectives of the study. The ECM has the
correct sign of negative meaning that about 20.4% of the errors are corrected yearly. Precisely,
this speed of adjustment shows that about 20.4% percent of errors generated in each period is
automatically corrected by the system in the subsequent period and is statistically significant.
The study found that interest rate is a significant determinant of investment in Nigeria. This
should be expected as the cost on capital plays major role in investment decisions and the
prospects of investment in most economies. Also, the finding of the study revealed that public
expenditure exerts significant impact on investment in Nigeria. The impact of public expenditure
on investment stems from its role in financing critical infrastructure that improves investment
climate in the economy.
In addition to this, the study revealed that market capitalisation rate plays significant role on
investment in Nigeria. The Nigerian capital market has been showing signs of expansion over the
years. This has the propensity to attract investors to the economy. Also through the capital
42
market, funds can be raised by investors. In another vein, the study show that trade openness has
significant impact on investment in Nigeria. Trade openness leads to capital mobility that
encourages investment.
The study examined the differential impact of interest rate liberalization on investment in Nigeria
during the pre and post-liberalization regimes. The finding shows that there exists no differential
impact of interest rate liberalization on investment in Nigeria during the pre and post-
liberalization regimes. Hence, there is no difference in the impact of interest rate liberalisation
during the pre SAP and post SAP period. Finally, the result of the innovation accounting shows
that investment responds positively to shocks arising from interest rate and other control
variables used in the study. Hence, any change in these variables exerts positive influence on
investment.
6.2 POLICY RECOMMENDATIONS
With respect to the research findings, the following policy recommendations were suggested:
The government should use her monetary policies to influence interest rate in a way that it will
not serve as disincentive to investment. The high cost of borrowing in Nigeria has been
complained about by investors in the country. The spread between borrowing and lending rates
in very high and it is skewed in favour of borrowing rate. We are mindful of the relationship
between inflation rate and interest rate that is that, in a regime of high inflation rate, interest rate
is usually high due to the positive relationship between the two variables. On account of this,
effort should be geared towards reducing inflation rate to a lower single digit level so as to bring
down interest rate.
The budget should be structured in a way that capital expenditure is increased. The tradition in
the country is that recurrent expenditure takes a larger chunk of government expenditure, thereby
stifling the financing of capital projects. In her expenditure on capital projects, emphasis should
43
be laid on basic critical infrastructure that impact heavily on investment such as energy, roads
and the others.
The capital market should be broadened to make it more attractive to investors with the
introduction of more financial instruments and improvement on the regulatory framework that
gives confidence to investors. The political system should also be stabilised since it also
influences investors‟ confidence. It is also recommended that listing conditions should be made
simpler in order to attract new firms on the stock market.
Policies on external trade should be carefully crafted so that they will not have adverse effect on
the domestic economy. Much as trade liberalisation should be encouraged in order to boost
capital movement, effort should be made to protect domestic investors from stiff competition
arising from products from foreign companies. Incentives should be given to domestic producers
to cushion the effect of high cost of production in the country and, hence make their products
attractive in international market.
Any new policy on interest rate, capital market and trade should be made public before they are
implemented so that investors can gauge the likely implications of these policies on investment
and therefore, take appropriate measures. This is necessary as it has been revealed in the study
that shocks to these variables exert positive influence on investment. Since there is no
differential impact of interest rate liberalisation between the pre and post liberalisation period,
we recommend that monetary authorities should continue to manipulate this rate through
monetary policy committee meetings that is held periodically and the rates should be fine-tuned
in a way that it can boost investment without jeopardising other macroeconomic objectives.
6.3 CONCLUSION
44
This research has provided reliable evidence of the impact of interest rate on investment in
Nigeria. The conclusion to be drawn from this study is that interest rate exerts significant
influence on investment in Nigeria. In order to boost investment in Nigeria, certain
recommendations have been made in this study which when considered hold the key to
unlocking the investment potentials in the country.
Owing to the role played by interest rate in investment, making this rate affordable will go a long
way in boosting investment in Nigeria. In addition to interest rate, other control variables as used
in this study also impact on investment. They include government expenditure, market
capitalisation rate and trade openness. Infrastructural facilities such as electricity, roads and
others are germane to investment; therefore, government should improve its capital project in
order to finance these critical infrastructures. Without an efficient and effective capital market,
investment will be retarded. Owing to the importance of the capital market, policies should be
directed at broadening it through effective institutional framework.
Trade policies should be crafted to ensure that they do not hurt domestic investment. Since
Nigeria thrives on importing most of her needs, incentives should be given to domestic investors
to cushion the negative effect of dumping in the country. Also the monetary authorities should
continue to manipulate the interest rate in line macroeconomic realities in the economy. Finally,
policy changes on interest rate, trade and the capital market should be made public so that
investors can take appropriate measures to guide against unpleasant shocks that may arise from
the implementation of such policies.
6.4 RECOMMENDATIONS FOR FURTHER STUDIES
45
This research work as could be seen from all our hypotheses and analyses is limited to
investigating the impact of interest rate on investment in Nigeria. It is worthy to note that this
study did not consider some variables that may affect investment in Nigeria. These variables
include fiscal deficit which has the tendency to crowd out private investment and it is pertinent to
note that Nigeria embarks more on fiscal deficit in her budget execution due to short fall in
revenue. Another variable is exchange rate which is very important in influencing investment
through its impact on portfolio investment and the importation of production inputs by domestic
investors. In subsequent studies, we also recommend that focus should be placed on investigating
the determinants of the three types of investment in Nigeria viz: foreign direct investment,
private investment and public investment. In summary, we recommend the following for further
studies:
I. The inclusion of fiscal deficit as a control variable in analysing the determinants of
investment in Nigeria
II. The inclusion of exchange rate as another important control variable.
III. Placing a focus on foreign direct investment, private investment and public investment thier
determinants in Nigeria.
46
APPENDIX A
DATA PRESENTATION
YEAR INVT IR MKCP PUBEXP TROP
1970 3.16219E+13 7 2550000000 247.5 0.3892126
1971 2.95221E+13 7 2770000000 444.0 0.5030856
1972 2.74223E+13 7 2990000000 594.0 0.4954832
1973 2.53224E+13 7 3210000000 729.8 0.6597363
1974 2.32226E+13 7 3430000000 1,353.5 0.4731308
1975 2.11227E+13 6.25 3650000000 3,059.3 0.3182318
1976 1.90229E+13 6.5 3870000000 4,657.6 0.4082684
1977 1.69231E+13 6 4090000000 6,339.9 0.4671396
1978 1.48232E+13 6.75 4310000000 4,213.9 0.4887008
1979 1.27234E+13 7.7875 4530000000 4,342.4 0.6113699
1980 1.06236E+13 8.4316667 4750000000 7,233.8 0.7380251
1981 8.65792E+12 8.9166667 5000000000 10,990.9 0.1162784
1982 6.29859E+12 9.5375 5000000000 10,680.5 0.0950341
1983 4.17214E+12 9.9766667 5700000000 11,090.9 0.0883964
1984 2.36728E+12 10.241667 5500000000 7,064.9 0.0886143
1985 2.58311E+12 9.4333333 6600000000 5,857.1 0.0934329
1986 2.60227E+12 9.9591667 6800000000 5,774.7 0.0723605
1987 1.67929E+12 13.961667 8200000000 8,263.5 0.2354529
1988 1.43907E+12 16.616667 10000000000 10,778.5 0.2394012
1989 1.94941E+12 20.441667 12800000000 12,974.7 0.3752442
1990 2.73549E+12 25.3 16300000000 20,049.3 0.5815885
1991 2.71815E+12 20.041667 23100000000 27,023.7 0.7951714
1992 2.65247E+12 24.758333 31200000000 37,060.6 1.2852145
1993 3.0695E+12 31.65 47500000000 44,180.7 1.3987771
1994 2.73698E+12 20.483333 66300000000 55,916.2 1.3390715
1995 2.01907E+12 20.233333 1.804E+11 77,895.1 6.0616356
1996 2.38114E+12 19.836667 2.858E+11 83,987.6 6.3734449
1997 2.59143E+12 17.795 2.819E+11 92,686.2 6.9113379
1998 2.46212E+12 18.184167 2.626E+11 143,168.0 5.1120182
1999 2.39154E+12 20.29 3E+11 167,896.1 6.5715559
2000 2.79685E+12 21.274167 4.723E+11 359,670.6 8.9032047
2001 2.18327E+12 23.438333 6.625E+11 596,956.4 9.0369357
2002 2.62663E+12 24.770833 7.649E+11 724,537.2 7.5181132
2003 3.94171E+12 20.714167 1.3593E+12 921,159.7 10.822544
2004 2.99637E+12 19.180833 2.1125E+12 1,125,057.0 12.490762
47
2005 2.68397E+12 17.948333 2.90006E+12 1,478,585.4 17.880103
2006 4.27559E+12 16.9 5.1209E+12 1,586,796.6 17.51061
2007 6.05865E+12 16.939167 1.31817E+13 2,116,138.9 19.269513
2008 6.01503E+12 15.479833 9.56297E+12 3,021,602.24 22.839743
2009 8.10499E+12 18.361667 7.03084E+12 2,776,912.95 18.802556
2010 9.59106E+12 17.585 9.91821E+12 3,266,234.72 24.888056
2011 6.75696E+12 16.016667 9.67265E+12 3,542,001.15 30.045269
2012 6.92655E+12 16.7925 1.48009E+13 3,844,925.84 26.798002
Descriptive Statistics
INVT IR MKCP PUBEXP TROP
Mean 8.25E+12 15.11112 1.84E+12 609933.3 6.283531
Median 3.94E+12 16.79250 2.31E+10 27023.70 0.795171
Maximum 3.16E+13 31.65000 1.48E+13 3844926. 30.04527
Minimum 1.44E+12 6.000000 2.55E+09 247.5000 0.072361
Std. Dev. 8.57E+12 6.623125 3.85E+12 1104408. 8.605110
Skewness 1.446221 0.196137 2.153904 1.809700 1.346579
Kurtosis 3.826860 2.158639 6.379887 4.904454 3.594810
Jarque-Bera 16.21443 1.544000 53.71568 29.96920 13.62902
Probability 0.000301 0.462088 0.000000 0.000000 0.001098
Sum 3.55E+14 649.7782 7.92E+13 26227134 270.1918
Sum Sq. Dev. 3.09E+27 1842.363 6.22E+26 5.12E+13 3110.013
Observations 43 43 43 43 43
Descriptive Statistics
LOG_INVT IR LOG_MKCP LOG_PUBEXP TROP
Mean 29.29575 15.11112 24.97493 24.51328 6.283531
Median 29.00264 16.79250 23.86310 24.01998 0.795171
Maximum 31.08487 31.65000 30.32571 28.97778 30.04527
Minimum 27.99502 6.000000 21.65936 19.32679 0.072361
Std. Dev. 0.918081 6.623125 2.995657 2.787700 8.605110
Skewness 0.605895 0.196137 0.517177 0.135840 1.346579
Kurtosis 2.010128 2.158639 1.754934 1.924502 3.594810
Jarque-Bera 4.386508 1.544000 4.694303 2.204655 13.62902
Probability 0.111553 0.462088 0.095641 0.332097 0.001098
Sum 1259.717 649.7782 1073.922 1054.071 270.1918
Sum Sq. Dev. 35.40066 1842.363 376.9064 326.3935 3110.013
Observations 43 43 43 43 43
APPENDIX B
48
Unit Root Test: Augmented Dickey Fuller Test
At Level
LOG_INVT @ Intercept
Null Hypothesis: LOG_INVT has a unit root Exogenous: Constant Lag Length: 3 (Automatic - based on SIC, maxlag=9)
t-Statistic Prob.* Augmented Dickey-Fuller test statistic -2.274637 0.1849
Test critical values: 1% level -3.610453 5% level -2.938987 10% level -2.607932 *MacKinnon (1996) one-sided p-values.
LOG_INVT @ Trend
Null Hypothesis: LOG_INVT has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -1.498026 0.8133
Test critical values: 1% level -4.211868
5% level -3.529758
10% level -3.196411
At First Difference
D(LOG_INVT) @ Intercept
Null Hypothesis: D(LOG_INVT) has a unit root
Exogenous: Constant
Lag Length: 2 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -1.839962 0.3563
Test critical values: 1% level -3.610453
5% level -2.938987
10% level -2.607932
*MacKinnon (1996) one-sided p-values.
D(LOG_INVT) @ Trend
Null Hypothesis: D(LOG_INVT) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.*
49
Augmented Dickey-Fuller test statistic -2.565233 0.2973
Test critical values: 1% level -4.211868
5% level -3.529758
10% level -3.196411
*MacKinnon (1996) one-sided p-values.
Unit Root Test: Phillip Perron (PP)Test
At Level
LOG_INVT @ Intercept
Null Hypothesis: LOG_INVT has a unit root
Exogenous: Constant
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -1.975422 0.2961
Test critical values: 1% level -3.596616
5% level -2.933158
10% level -2.604867
*MacKinnon (1996) one-sided p-values.
LOG_INVT @ Trend
Null Hypothesis: LOG_INVT has a unit root
Exogenous: Constant, Linear Trend
Bandwidth: 2 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -0.712931 0.9654
Test critical values: 1% level -4.192337
5% level -3.520787
10% level -3.191277
*MacKinnon (1996) one-sided p-values.
At First Difference
D(LOG_INVT) @ Intercept
Null Hypothesis: D(LOG_INVT) has a unit root
Exogenous: Constant
Bandwidth: 3 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -4.803956 0.0003
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
50
*MacKinnon (1996) one-sided p-values.
D(LOG_INVT) @ Trend
Null Hypothesis: D(LOG_INVT) has a unit root
Exogenous: Constant, Linear Trend
Bandwidth: 0 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -5.462225 0.0003
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
*MacKinnon (1996) one-sided p-values.
Unit Root Test: Augmented Dickey Fuller (ADF) Test
At Level
Market Capitalization @ Intercept
Null Hypothesis: LOG_MKCP has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic 1.547435 0.9992
Test critical values: 1% level -3.596616
5% level -2.933158
10% level -2.604867
*MacKinnon (1996) one-sided p-values.
Market Capitalization @ Trend
Null Hypothesis: LOG_MKCP has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -1.816263 0.6790
Test critical values: 1% level -4.192337
5% level -3.520787
10% level -3.191277
*MacKinnon (1996) one-sided p-values.
51
At First Difference
Market Capitalization @ Intercept
Null Hypothesis: D(LOG_MKCP) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -4.625669 0.0006
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
*MacKinnon (1996) one-sided p-values.
Market Capitalization @ Trend
Null Hypothesis: D(LOG_MKCP) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -4.990688 0.0012
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
*MacKinnon (1996) one-sided p-values.
Unit Root Test: Phillip Perron (PP) Test
At Level
Market Capitalization @ Intercept
Null Hypothesis: LOG_MKCP has a unit root
Exogenous: Constant
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic 1.335216 0.9984
Test critical values: 1% level -3.596616
5% level -2.933158
10% level -2.604867
*MacKinnon (1996) one-sided p-values.
Market Capitalization @ Trend
52
Null Hypothesis: LOG_MKCP has a unit root
Exogenous: Constant, Linear Trend
Bandwidth: 0 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -1.816263 0.6790
Test critical values: 1% level -4.192337
5% level -3.520787
10% level -3.191277
*MacKinnon (1996) one-sided p-values.
At First Difference
Market Capitalization @ Intercept
Null Hypothesis: D(LOG_MKCP) has a unit root
Exogenous: Constant
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -4.641867 0.0005
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
*MacKinnon (1996) one-sided p-values.
Market Capitalization @ Trend
Null Hypothesis: D(LOG_MKCP) has a unit root
Exogenous: Constant, Linear Trend
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -5.013509 0.0011
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
*MacKinnon (1996) one-sided p-values.
Unit Root Test: Augmented Dickey Fuller (ADF) Test
At Level
Public Expenditure @ Intercept
Null Hypothesis: LOG_PUBEXP has a unit root
53
Exogenous: Constant
Lag Length: 1 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -0.626670 0.8534
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
*MacKinnon (1996) one-sided p-values.
Public Expenditure @ Trend
Null Hypothesis: LOG_PUBEXP has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -2.301933 0.4235
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
*MacKinnon (1996) one-sided p-values.
At First Difference
Public Expenditure @ Intercept
Null Hypothesis: D(LOG_PUBEXP) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -4.353849 0.0013
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
*MacKinnon (1996) one-sided p-values.
Public Expenditure @ Trend
Null Hypothesis: D(LOG_PUBEXP) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9) t-Statistic Prob.* Augmented Dickey-Fuller test statistic -4.297590 0.0078
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
54
*MacKinnon (1996) one-sided p-values.
Unit Root Test: Phillip Perron (PP) Test
At Level
Public Expenditure @ Intercept
Null Hypothesis: LOG_PUBEXP has a unit root
Exogenous: Constant
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -1.029646 0.7340
Test critical values: 1% level -3.596616
5% level -2.933158
10% level -2.604867
*MacKinnon (1996) one-sided p-values.
Public Expenditure @ Trend
Null Hypothesis: LOG_PUBEXP has a unit root
Exogenous: Constant, Linear Trend
Bandwidth: 2 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -2.092437 0.5349
Test critical values: 1% level -4.192337
5% level -3.520787
10% level -3.191277
*MacKinnon (1996) one-sided p-values.
At First Difference
Public Expenditure @ Intercept
Null Hypothesis: D(LOG_PUBEXP) has a unit root
Exogenous: Constant
Bandwidth: 5 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -4.174763 0.0021
Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836
*MacKinnon (1996) one-sided p-values.
Public Expenditure @ Trend
Null Hypothesis: D(LOG_PUBEXP) has a unit root
55
Vector Autoregression Estimates
Date: 06/11/15 Time: 16:14
Sample (adjusted): 1972 2012
Included observations: 41 after adjustments
Standard errors in ( ) & t-statistics in [ ] INVT IR MKCP PUBEXP TROP INVT(-1) 0.931885 -1.687193 -0.069354 0.224175 0.996317
(0.19010) (2.30490) (0.20278) (0.20362) (1.49929)
[ 4.90221] [-0.73200] [-0.34202] [ 1.10096] [ 0.66453]
INVT(-2) -0.045668 -1.261092 0.049462 -0.230645 0.094564
(0.19807) (2.40165) (0.21129) (0.21216) (1.56222)
[-0.23056] [-0.52509] [ 0.23410] [-1.08711] [ 0.06053]
IR(-1) 0.019280 0.561908 -0.008945 0.005472 -0.080811
(0.01454) (0.17636) (0.01552) (0.01558) (0.11472)
[ 1.32558] [ 3.18623] [-0.57655] [ 0.35124] [-0.70445]
IR(-2) -0.015957 0.120510 0.043271 -0.000159 0.089682
(0.01452) (0.17609) (0.01549) (0.01556) (0.11454)
[-1.09877] [ 0.68436] [ 2.79312] [-0.01019] [ 0.78295]
MKCP(-1) 0.016063 -2.274995 1.090617 0.053654 3.244828
(0.17703) (2.14654) (0.18885) (0.18963) (1.39627)
[ 0.09073] [-1.05984] [ 5.77519] [ 0.28294] [ 2.32392]
MKCP(-2) 0.087960 1.937221 -0.251942 0.111769 -2.764423
(0.19281) (2.33784) (0.20568) (0.20653) (1.52071)
[ 0.45619] [ 0.82864] [-1.22495] [ 0.54118] [-1.81784]
PUBEXP(-1) -0.059693 3.347299 -0.003423 1.132858 -1.389933
(0.16641) (2.01778) (0.17752) (0.17825) (1.31252)
[-0.35870] [ 1.65890] [-0.01928] [ 6.35534] [-1.05898]
PUBEXP(-2) -0.063648 -3.560055 0.049364 -0.296626 1.831314
(0.15156) (1.83772) (0.16168) (0.16235) (1.19540)
[-0.41994] [-1.93721] [ 0.30532] [-1.82712] [ 1.53197]
TROP(-1) -0.006313 0.132256 -0.014544 -0.009977 0.382184
(0.02420) (0.29348) (0.02582) (0.02593) (0.19090)
[-0.26081] [ 0.45064] [-0.56327] [-0.38480] [ 2.00197]
TROP(-2) 0.018065 0.070013 0.052253 -0.003804 0.419052
(0.03215) (0.38978) (0.03429) (0.03443) (0.25355)
[ 0.56196] [ 0.17962] [ 1.52377] [-0.11049] [ 1.65276]
C 3.618867 103.4342 2.943959 0.264197 -52.83010
(3.36208) (40.7652) (3.58639) (3.60125) (26.5169)
[ 1.07638] [ 2.53731] [ 0.82087] [ 0.07336] [-1.99232] R-squared 0.948793 0.872172 0.995242 0.993839 0.969662
Adj. R-squared 0.931723 0.829563 0.993656 0.991786 0.959549
Sum sq. Resids 1.481920 217.8651 1.686252 1.700257 92.18329
S.E. equation 0.222255 2.694841 0.237083 0.238066 1.752934
F-statistic 55.58519 20.46907 627.5401 483.9482 95.88555
Log likelihood 9.888307 -92.41771 7.240331 7.070765 -74.78572
Akaike AIC 0.054229 5.044766 0.183398 0.191670 4.184669
Schwarz SC 0.513968 5.504505 0.643137 0.651409 4.644408
56
Exogenous: Constant, Linear Trend
Mean dependent 29.21016 15.50678 25.13465 24.75202 6.568281
S.D. dependent 0.850581 6.527564 2.976644 2.626686 8.715692 Determinant resid covariance (dof adj.) 0.002297
Determinant resid covariance 0.000482
Log likelihood -134.3013
Akaike information criterion 9.234212
Schwarz criterion 11.53291
Bandwidth: 5 (Newey-West automatic) using Bartlett kernel Adj. t-Stat Prob.* Phillips-Perron test statistic -4.110891 0.0125
Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902
*MacKinnon (1996) one-sided p-values.
APPENDIX C
ERROR CORRECTION MODEL
Dependent Variable: D(INVT)
Method: Least Squares
Date: 06/10/15 Time: 17:40
Sample (adjusted): 1974 2012
Included observations: 39 after adjustments Variable Coefficient Std. Error t-Statistic Prob. D(PUBEXP) 0.126523 0.090359 1.400235 0.1742
D(INVT(-1)) 0.549405 0.161942 3.392606 0.0024
D(IR(-1)) 0.016917 0.008141 2.078009 0.0486
D(MKCP(-1)) -0.099170 0.105605 -0.939063 0.3571
D(INVT(-2)) -0.460641 0.149850 -3.074008 0.0052
D(MKCP(-2)) 0.300151 0.121245 2.475573 0.0208
D(PUBEXP(-2)) 0.240345 0.111446 2.156594 0.0413
D(TROP(-2)) 0.030419 0.016465 1.847468 0.0770
D(INVT(-3)) 0.625582 0.141274 4.428160 0.0002
D(IR(-3)) 0.027970 0.009411 2.972156 0.0066
D(MKCP(-3)) -0.125134 0.128748 -0.971930 0.3408
D(TROP(-3)) 0.059035 0.021257 2.777255 0.0105
ECM(-1) -0.204457 0.078361 -2.609176 0.0154
PERIOD_DUMMY -0.073670 0.101637 -0.724837 0.4756
C -0.116900 0.075790 -1.542420 0.1361 R-squared 0.806135 Mean dependent var -0.033239
Adjusted R-squared 0.693047 S.D. dependent var 0.243446
S.E. of regression 0.134877 Akaike info criterion -0.885179
Sum squared resid 0.436606 Schwarz criterion -0.245347
Log likelihood 32.26098 Hannan-Quinn criter. -0.655613
F-statistic 7.128395 Durbin-Watson stat 2.016659
Prob(F-statistic) 0.000016
57
APPENDIX D
Variance Decomposition
Variance Decomposition of INVT: Period S.E. INVT IR MKCP PUBEXP TROP
1 0.222255 100.0000 0.000000 0.000000 0.000000 0.000000 (0.00000) (0.00000) (0.00000) (0.00000) (0.00000)
2 0.316437 97.22985 2.443667 0.018645 0.205900 0.101933 (6.14111) (5.26869) (1.94219) (1.52424) (1.81610)
3 0.364583 96.38232 2.556814 0.099581 0.574585 0.386696 (8.57027) (5.72052) (3.18353) (3.66588) (3.23944)
4 0.401555 93.50485 2.182808 0.886679 2.553589 0.872073 (11.3203) (5.77538) (4.38422) (6.77492) (5.52589)
5 0.433265 88.40230 1.876294 2.243202 5.715594 1.762608 (13.5646) (6.06436) (5.20228) (9.50031) (7.98525)
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of INVT to INVT
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of INVT to IR
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of INVT to MKCP
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of INVT to PUBEXP
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of INVT to TROP
-4
-2
0
2
4
2 4 6 8 10
Response of IR to INVT
-4
-2
0
2
4
2 4 6 8 10
Response of IR to IR
-4
-2
0
2
4
2 4 6 8 10
Response of IR to MKCP
-4
-2
0
2
4
2 4 6 8 10
Response of IR to PUBEXP
-4
-2
0
2
4
2 4 6 8 10
Response of IR to TROP
- .4
.0
.4
.8
2 4 6 8 10
Response of MKCP to INVT
- .4
.0
.4
.8
2 4 6 8 10
Response of MKCP to IR
- .4
.0
.4
.8
2 4 6 8 10
Response of MKCP to MKCP
- .4
.0
.4
.8
2 4 6 8 10
Response of MKCP to PUBEXP
- .4
.0
.4
.8
2 4 6 8 10
Response of MKCP to TROP
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of PUBEXP to INVT
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of PUBEXP to IR
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of PUBEXP to MKCP
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of PUBEXP to PUBEXP
- .4
-.2
.0
.2
.4
.6
2 4 6 8 10
Response of PUBEXP to TROP
-2
-1
0
1
2
3
4
2 4 6 8 10
Response of TROP to INVT
-2
-1
0
1
2
3
4
2 4 6 8 10
Response of TROP to IR
-2
-1
0
1
2
3
4
2 4 6 8 10
Response of TROP to MKCP
-2
-1
0
1
2
3
4
2 4 6 8 10
Response of TROP to PUBEXP
-2
-1
0
1
2
3
4
2 4 6 8 10
Response of TROP to TROP
Response to Cholesky One S.D. Innovations ± 2 S.E.
58
6 0.462854 82.43824 1.647531 3.780517 8.802206 3.331507 (15.4334) (6.68289) (5.85700) (11.3379) (10.3361)
7 0.490450 76.78700 1.566919 5.192035 10.83613 5.617923 (16.8201) (7.12780) (6.46057) (12.3430) (12.2234)
8 0.516694 71.64450 1.764034 6.380657 11.66333 8.547475 (17.7471) (7.50750) (7.02393) (12.6499) (13.5932)
9 0.542382 66.93084 2.231632 7.386768 11.61964 11.83112 (18.3605) (7.75975) (7.49538) (12.5945) (14.6990)
10 0.567863 62.59629 2.839074 8.295521 11.11120 15.15791 (18.7693) (8.05320) (7.94182) (12.4280) (15.5903)
Variance Decomposition of IR: Period S.E. INVT IR MKCP PUBEXP TROP
1 2.694841 2.247212 97.75279 0.000000 0.000000 0.000000 (4.59079) (4.59079) (0.00000) (0.00000) (0.00000)
2 3.269561 2.925026 90.74103 0.343339 5.571510 0.419092 (4.90275) (8.62288) (3.22969) (5.65347) (2.72678)
3 3.593631 5.412227 86.65959 0.285759 6.460262 1.182165 (7.14904) (9.96320) (3.58343) (6.61179) (3.68006)
4 3.747968 10.24925 81.95981 0.324252 6.253599 1.213088 (9.67896) (11.6220) (3.82243) (7.01270) (4.12205)
5 3.898316 16.42787 76.19197 0.381241 5.793406 1.205510 (11.9337) (12.9675) (3.88343) (7.01633) (5.31568)
6 4.038571 21.98740 71.09134 0.379118 5.402179 1.139969 (13.3278) (13.9998) (4.01665) (6.99162) (6.83668)
7 4.163908 26.43151 66.95302 0.364563 5.177219 1.073694 (14.3238) (14.6021) (4.25635) (6.94800) (8.00128)
8 4.274438 29.59986 63.62667 0.453435 5.292383 1.027660 (14.8650) (15.0238) (4.46475) (6.84006) (8.78241)
9 4.375536 31.68558 60.78774 0.697718 5.775669 1.053293 (15.1650) (15.2619) (4.71093) (6.75887) (9.41982)
10 4.469760 32.97117 58.26962 1.073017 6.448865 1.237328 (15.2359) (15.4114) (5.03372) (6.88330) (9.98708)
Variance Decomposition of MKCP: Period S.E. INVT IR MKCP PUBEXP TROP
1 0.237083 9.677499 0.136251 90.18625 0.000000 0.000000 (9.08047) (3.93267) (9.82620) (0.00000) (0.00000)
2 0.344501 8.420559 1.020106 90.09547 0.007387 0.456473 (9.31146) (4.89754) (10.7313) (1.88597) (2.11597)
3 0.422261 6.769272 3.341337 88.18734 0.094848 1.607206 (9.38502) (6.45149) (11.2789) (3.57179) (2.70159)
4 0.500810 5.290066 9.209725 80.84039 0.832718 3.827098 (9.12499) (9.96407) (13.0331) (4.49711) (5.09834)
5 0.584520 3.926685 15.31539 71.64695 2.161507 6.949471 (8.44245) (12.9275) (15.2453) (5.12781) (7.46156)
6 0.667887 3.028130 19.54645 64.19354 3.425478 9.806394 (8.00721) (14.7773) (16.7826) (5.60689) (9.12141)
7 0.747264 2.608560 21.92386 58.85056 4.408364 12.20865 (7.98913) (15.7997) (17.6702) (5.97925) (10.4064)
8 0.822065 2.567983 23.10789 55.03103 5.141838 14.15126 (8.60198) (16.5442) (18.0929) (6.34468) (11.4935)
9 0.892818 2.775676 23.64325 52.14333 5.753838 15.68391 (9.57645) (17.1918) (18.2315) (6.71629) (12.4565)
10 0.960237 3.112395 23.87171 49.79797 6.353085 16.86484 (10.6443) (17.7023) (18.2162) (7.11054) (13.2884)
Variance Decomposition of PUBEXP: Period S.E. INVT IR MKCP PUBEXP TROP
1 0.238066 0.039138 1.390176 9.560830 89.00986 0.000000 (3.04281) (4.93222) (7.90266) (10.1664) (0.00000)
2 0.366176 2.257222 2.149995 10.06490 85.33776 0.190129 (4.95131) (6.65055) (9.18726) (12.2523) (2.05872)
3 0.452427 3.861929 3.344183 12.01060 80.13844 0.644843 (7.36434) (8.84694) (10.9205) (14.0921) (3.86873)
59
4 0.510286 4.222772 4.060143 15.35319 75.40907 0.954824 (8.93637) (10.7199) (12.4949) (15.2504) (5.75265)
5 0.551600 3.987607 4.697837 19.77318 70.46948 1.071892 (10.0237) (12.0892) (13.9783) (16.1890) (7.46271)
6 0.585446 3.558833 5.518499 24.41971 65.49614 1.006823 (10.4245) (13.0924) (14.9707) (16.8585) (9.03607)
7 0.617613 3.273155 6.757326 28.46506 60.59023 0.914232 (10.3964) (13.9400) (15.5055) (17.2459) (10.2738)
8 0.651277 3.311380 8.465177 31.38560 55.84102 0.996828 (10.1341) (14.7082) (15.7426) (17.4004) (11.2923)
9 0.687713 3.713399 10.47421 33.06209 51.39428 1.356029 (9.83238) (15.3247) (15.7804) (17.4003) (12.0516)
10 0.726709 4.428921 12.48856 33.69891 47.43134 1.952269 (9.68990) (15.8131) (15.7004) (17.3168) (12.5588)
Variance Decomposition of TROP: Period S.E. INVT IR MKCP PUBEXP TROP
1 1.752934 5.647738 0.006278 10.25286 0.739384 83.35374 (7.38990) (3.45202) (8.75361) (2.62970) (9.71100)
2 2.091600 5.701093 1.763536 23.43686 2.000754 67.09776 (7.23920) (5.95149) (10.9060) (3.62617) (11.3103)
3 2.369224 4.944055 1.402389 27.64121 1.624886 64.38746 (7.34784) (5.84948) (11.4612) (4.29378) (12.2443)
4 2.645371 5.767450 2.113143 29.47929 1.390037 61.25008 (8.15431) (6.12315) (11.6171) (4.89144) (12.4661)
5 2.930909 6.784639 3.836574 29.68619 1.782961 57.90964 (8.88922) (6.97964) (11.9842) (5.22821) (12.9540)
6 3.225805 7.565673 5.791490 29.58528 2.391246 54.66632 (9.78039) (8.03188) (12.2851) (5.61598) (13.6347)
7 3.509771 7.982370 7.295428 29.98165 2.827005 51.91354 (10.3790) (9.32416) (12.7149) (5.97081) (14.2326)
8 3.781997 8.017775 8.374371 30.87311 3.012399 49.72234 (10.9280) (10.3826) (13.1685) (6.27178) (14.8803)
9 4.047784 7.771567 9.210205 32.03453 3.031716 47.95198 (11.1850) (11.3996) (13.5646) (6.57787) (15.3719)
10 4.313535 7.339414 9.969342 33.20320 2.987981 46.50006 (11.3643) (12.2225) (13.8461) (6.90504) (15.7942)
Cholesky Ordering: INVT IR MKCP PUBEXP TROP Standard Errors: Monte Carlo (100 repetitions)
60
REFERENCES
Acha I. A and Acha C. K (2011). Interest Rates in Nigeria: An Analytical Perspective. Research Journal of
Finance and Accounting. ISSN 2222. 2 (3) 71-82
Adebiyi M. A (2001). Can High Interest Rate Promote Economic Growth without Fuelling Inflation in
Nigeria? Journal of Economic and Social Studies. 86-100
Agu, C.C (1988). Interest Rate Policy in Nigeria and Its Attendant Distortions”, in Arnaldo Mauri, Oscar
Garavello and Mario Masini(eds), Saving and Development, Quarterly Review 1( Xll).
Akhtar M. A (1974) .The Demand for Money in Pakistan. Pakistan Development Review 13:140-150 springs.
Akiri E.S and Adofu I. (2007). Interest Rate Deregulation and Investment in Nigeria. Journal of Economic
and Management Studies. 2(1)
Akpan (2004). Financial Liberalization and Endogenous Growth: The Case of Nigeria. Africa Institute for
Economic Development and Planning (IDEP).
Ani (1988), Cited in Adofu et al (2010). An Assessment of the Effect of Interest Rate Deregulation in
Enhancing Agricultural Productivity in Nigeria. Current Research Journal on Economic Theory, 82-86
Anyanun J. C and Oaikhenan H. E. (1995). Modern Macro-Economics: Theory and Application in Nigeria.
Joanee Educational Publisher Ltd.
Arturo, G, Fabio, S and Andrew W (2002). Does Financial Liberalization Improve the Allocation of
Investment? Micro Evidence from Developing Countries. World Bank Economic Review.
Asamoah, G. N (2008). The Impact of the Financial Sector Reforms on Savings, Investment and Growth of
Gross Domestic Product (GDP) in Ghana. International Business and Economic Research Journal. 7
(10): 73-84.
Asian Development Bank (1985); Domestic Resource Mobilization Through Financial Development. Manila;
Asia Development Bank, September
Bouzid, A. (2012). McKinnon‟s Complementarity Hypothesis: Empirical Evidence for the Arab
Maghrebean Countries. The Romanian Economic Journal
CBN. (2007). Statistical Bulletin. Abuja, CBN.
CBN. (2012). Statistical Bulletin. Abuja, CBN.
Chris,O.U. and Anyingang, R.O. (2012). The Effect of Interest Rate Fluctuation on the Economic Growth of
Nigeria, 170-2010. International Journal of Business and Social Science. 3 (20)
Chuba, M. A (1997); Interest Rate Regulation, Deregulation and Saving Mobilization in Nigeria, 1970-1994.
An unpublished M. Sc thesis, Dept of Economics, A. B. U. Zaria.
Chuba, M. A (2005). Interest Rates Policy and Investment Behaviour in Nigeria. Journal of Economics and
Social Research. 3(2)
Corbo, V and Schmidt-Hebbel, K (1991). Public Policies and Saving Rate in Developing Countries. Journal of
Development Economic, 36:89-115, July.
61
David, A.O. and Gabriel, F.O. (1999). The Impact of Interest Rate Liberalization on the Corporate Financing
Strategies of Quoted Companies in Nigeria. The African Economic Research Consortium. Nairobi,
Kenya
Dale, W. J. (1967).The Theory of Investment Behaviour http//www.nber.org/chapter/c1235. 129-188
Deaton, A. (1992). Understanding Consumption. Oxford University Press.
Easterly, W. (1990). Endogenous Growth in Developing Countries with Government Induced Distortions.
Mimed, World Bank.
Edwards, S. (1994). Why are Latin America‟s Saving Rate So Low? Manuscript presented at the conference
on growth prospects in Latin America, Bogota(Colombia), June
Eregha, P. B (2010). Interest Rate Variation and Investment Determination in Nigeria. International Business
Management Medwell Journals 4(2): 41-46 ISSN: 1993-5250
Essian, U. (2005). Macro Economic Theory. Calabar Sae sprint (Nig). Co
Fisher, Benhard (1981). Interest Rate Ceilings, Inflation and Economic Growth in Developing Countries.
Economics, 23: 74-93.
Fitz Gerald, E. V. K (1989). The Impact of Macroeconomic Policies on Small Scale Industry: Some Analytical
Considerations. Working paper (Sub-series on Money, Finance and Development), No 36, the Hague
:155, November.
Fitz Gerald, E. V. K and Sermad, R. (1990). Public and Private Sector Capital Account Behaviour in
LDCs,1970-1988. Working paper (Sub-series on Money, Finance and Development). 36, the Hague
:55,
Fryo M. J (1978). Money and Capital or Financial Deeping in Economic Development.” Journal of money,
credit and banking. 10(3) 24:49-62.
Fryo, M. J (1980). Savings, Investment, Growth and The Cost of Financial Repression. World Development,
8(7) April. Federal Reserve Bank of San Francisco.
Fryo, M. J (1981a). Interest Rate in Asia: An Examination of Interest Rate Policies in India, Burma, Indonesia,
Korea, Malaysia, Napal, Palistan, the Phillippines, Singapore, Sri lanka, Taiwan and Thailand.
Washington D.C. IMF
Fryo, M. J (1981b). Inflation and Economic Growth in Pacific Basin Developing Countries. Federal Reserve
Bank of San Francisco
Fryo M. J (1986). Terms-of-Trade Dynamics in Asia: An Analysis of National Saving and Domestic
Investment Responses to Term-of –trade Change in 14 Asian Countries. Journal of International
Money and Finance, Vol. 5
Fryo, M. J. (1995). Money, Interest and Banking Development, London: John Hopkins University press.
Gelb, A. (1989). Financial Liberalization and the Internal Structure of Capital Market in Financial
Liberalization and Internal Structure of Capital Market in Asia and Latin America, edited by Miguel
Urrutia. The United Nation University, Hong Kong 201-267
Giovanini, A. (1983). The Interest Elasticity of Saving in Developing Countries: The Existing Evidence.
World Development, 11(7): 601-07
62
Giovanini, A. (1985).Saving and Real Interest Rate in LDCs. Journal of Development Economic, Vol. 18
August.
Gujarati, D. N and Porter, W. C. (2009) Basic Econometrics, McGraw Hill
Gupta, K. L (1984). Financial Intermediation, Interest Rate and the Structure of Savings: Evidence from Asia.
Journal of Economic Development 9: 7-24 July.
Gupta, K. L (1987). Aggregate Saving, Financial Intermediation, and Interest Rate. Review of Economic and
Statistics, 69(2): 303-11
Harvey, C (2001). The Role of Commercial Banking in Recovery from Economic Disaster in Ghana,
Tanzania, Uganda and Zambia. IDS Discussion Paper 325.
Harries J. W (1974). An Empirical note on the Investment Content of Real Output and the Deamand for
Money in the Developing Economy. Malaysian Economic.
Ikhide S. I and Alawade A. A. (2001). Financial Sector Reform, Microeconomic Instability and The Order
of Economic Liberalization: The Evidence From Nigeria. African Economic Research Paper 112, ISBN
9966, 944-52.
Jansen, K. (1989); “Monetary Policy and Financial Development.” In Fitz Gerald E. V. K and Vos, R.
Financial Economic Development: A Structural Approach to Monetary Policy in the Third World.
Aldershot; Aresburu press.
Jao, Y. C. (1976). Financial Deeping and Economic Growth: A Cross-Section Analysis. Malaysian Economic
Review 21:47-58 April.
Jhingan, M. L (1997). The Economic of Development and Planning .9th Edition, Publication (P) Ltd. India
Jhingan, M. L (2010). Monetary Economics 6th Edition. Vrinda Publication (P) Ltd. India
Jhingan. M. L (2010). Macro Economic Theory 12th Edition. Vrinda Publication (P) Ltd. India
Johan, E. E. (2013). Theories of Investment: A Theoretical Review with Empirical Application. Working
Paper Series from Swedish Entrepreneurship Forum, Research Network Database.
John, T. (1990). Money and Capital in Economic Development: A Test of the Mc kinnon Hypothesis for
Nepal. Journal of money, credit and banking.
John, T (1991). The Financial Regression Paradigm: A Survey of Empirical Research, in Arnaldo Mauri,
Oscar Garavello and Macro Mabini (eds) Savings and Economic Development, Quarterly Review 1(
Xv). Milan-Italy.
Jorg, G.H (2002). A Theory of Interest Rate. The Quaterly Journal of Austrian Economics 5(4), 77-110
Kar, M and Pentecost, E. J (2001). A System Test of McKinnon's Complementarily Hypothesis
With An Application to Turkey. Economic Development and Cultural Change 18(2).
Keynes J. M (1936). The General Theory of Employment, Interest Rate and Money; New York: Harcourt,
Brace and Co.
Khatkhate, D. A. (1988). Assessing the Impact of Interest Rate in Less Developed Countries. World
Development, 577-88, May.
Lanyi, A. and Saracoglu, R. (1983). Interest Rate Policies in Developing Countries. Occasional Paper 22,
Washington DC IMF. October
63
Lerner, (1996) cited in Jhingan M. L (2010). Macro Economic Theory 12th Edition. Vrinda Publication (P) Ltd.
India
Levine, R. and Beck, T. (2000). Financial Intermediation and Growth: Causality and causes. Journal of Money
Economics, 46(1): 31-77.
Majed, B. and Ahmed, I. M (2010). The impact of Interest Rate on Investment in Jordan: A Co-integration
Analysis. JKAU: Economic and Administration, 24 (1), 199-209.
Matto, et al, (2006). Measuring Services Trade Liberalization and Its Impact on Growth: An Illustration.
Journal of Economic Integration 21(1): 64-98.
Mc Kinnon R. I. (1973). Money and Capital in Economic Development. Washington, D.C. brooking
Institution
Mc Kinnon R. I. (1993). The Order of Economic Liberalization and Over borrowing. paper and proceedings,
America Review, Vol. 87, No 2, 189-93
Nnanna, O.J. (2001). Monetary Policy Framework in Africa: The Nigerian Experience.
Proceedings of Conference on Monetary Policy Framework in Africa, Pretoria
Nwankwo G. O (1989). Nigeria Financial System. MacMillan publisher (Nig)Ltd.
Nyong .M. (2007). Government Size, Political Freedom and Economic Growth in Nigeria, 1960-2000.
Journal of third world studies, 13: 87-93.
Obamuyi, T.M (2009). An investigation of the Relationship between Interest Rates and
Economic Growth in Nigeria, (1970-2006). Journal of Economic and International
Finance 1(4), 093-098.
Obute, C. Adyorough, A. and Itodo, A. I (2012). An Assessment of the Impact of Interest Rate Deregulation
on Economic Growth in Nigeria (1964-2009). Journal of Business and Organisational Development.
ISSN 2277-0046. www.cenresinpub.org
Odhiambo N. M and Akinboade O. A. (2009).Interest Rate Reform and Financial Deeping in Botswana: An
Empirical Investigation. Economic note 38(1-2)
Ojo M. O (1988). Agricultural and Policy under Structural Adjustment Programme in Nigeria. A paper
presented at the 1988 annual Conference of Economic Society of Obafemi Awolowo University, Ile-ife
Nigeria
Omole D. A and Falokun G. O. (1999).The Impact of Interest Rate Liberalization on the Corporate Financial
Strategies of Quoted Companies in Nigeria. AERC Research Paper 88- Kenya: AERC
Owumere, J.U.J, Okore, A.O and Imo, G.I (2012). The Impact of interest Rate Liberalization on Savings and
Investment: Evidence from Nigeria. Research Journal of Financial and Accounting ISSN 2222-2847,
3(10), 130-136.
Ozdemir, D and Erbil, C. (2008). Does Financial Liberalization Trigger Long-run Economic Growth?
Evidence from Turkey and Other Recent EU Members. Paper prepared for the EcoMod international
conference on policy modelling, July 2-4 Berlin.
Phylaktis, Kate (1997). Capital Market Integration in the Pacific- basin Region: An Analysis of Real Interest
Rate Linkage. Pacific-Basin Finance Journal, Elsevier 5(2), 195-213.
64
Rashed, O.A (2010). Interest Rates Determinants in Nigeria: An Econometric X-ray. International Research
Journal of Finance and Economics. ISSN 1450-2880 Issue 47
Robert, G. K and Ross, L. (1992). Policy Uncertainty and Private Investment in Developing Countries. NBER
Working Paper 2999, June
Roubini, N. and Sala-i-matin (1992). Financial Repression and Economic Growth. Journal of Development
Economic 39(1), 5-30.
Sankhayan, P. L. (1988). Introduction to the Economics of Agricultural Production. Prentice-Hall of India
Private Limited, New Delhi
Schumidt-Hebbel, et al (1996). Saving and Investment: Paradigms, Policies. The World Bank Research
Observer, 11(1) 89-177
Sergio, P. L. and Sundararajan (1990). Issues in Interest Rate Management and Liberalization. IMF staff
paper 37(4) 23-55
Shaw E. S.(1973). Financial Deeping in Economic Development. New York, Oxford University press
Soyibo, A. and Adekanye, F. (1992). Financial System Regulation, Deregulation and Saving Mobilization
in Nigeria. AERC, Research paper 2, Nairobi Kenya.
Soyibo, A. M (1994). The Saving-Investment Process in Nigeria: An Empirical Study of the Supply Side.
AERC Research Paper 12. Narobi, Kenya.
Soyibo A. and Olayiwola K. (2000). Interest Rate Policy and Promotion of Savings, Investment and
Resource Mobilization in Nigeria. Research paper 24, Development policy centre Ibadan.
Stiglitz, J. (1993). Bank versus Market as Mechanism for Allocating and Co-ordinating Investment. NBER
work paper
Sundararajan, V. (1987). The Dept-Equity Ratio of Firms and the effectiveness of Interest Rate Policy.
IMF Staff Paper, 34(2), 260-310.
Tayor, L. (1988). Varieties of Stabilization Experience: Towards Sensible Macroeconomic in the Third
World. Oxford: clarendon press.
Turelboom, B. (1991). Interest Rate Liberalization: Some Lesson from Africa. IMF Woking Paper
WP/91/121
Uchendu A. O (1993). Interest Rate Policy, Savings and Investment in Nigeria. CBN: Economic and
Financial Review 31(1) March
Udoka C. O (2000). Community Banking as a Catalyst for Rural Economy Transformation in Nigeria.
International Journal of Social Science and Public Policy, Vol. 3(2) 175-182.
Webb, S. et al (1992). Household Saving in Developing Countries: First Cross-Country Evidence.
World Bank Economic Review, 6(3): 529-547, September.
Woodridge, J. M. (2013). Introductory Econometrics: A modern Approach, South-Western Cengage
Learning.
65