THE IMPACT OF INTEREST RATE LIBERALIZATION ON INVESTMENT IN NIGERIA

THE IMPACT OF INTEREST RATE LIBERALIZATION ON INVESTMENT IN NIGERIA

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 the extraneous variables were verified; using the Multiple-Equation VAR models. In addition, the variance decomposition result shows that Period 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.