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Macroeconomic Policy Dynamics and Private Investment Behaviour in Nigeria

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  • Baghebo Michael
  • Eniekezimene A. Francis

Abstract

This study was aimed at investigating private investment behaviour and macroeconomic policy dynamics in Nigeria using data covering the period between 1980 and 2012. The dependent variable is domestic private investment while the explanatory variables are: Real interest rate (INTR), Real exchange rate (REER), Inflation (INF) and Government size (GOVSIZE) proxied by ratio of government spending to GDP. The variables were tested for stationarity. Cointegration test was carried out to ascertain whether long run equilibrium relationship exist among the variables in the model. Five cointegrating equations were found. Since there are five cointegrating vectors, an economic interpretation of the long run private investment behaviour was obtained by normalizing the estimates of the unconstrained cointegrating vector on PINV. The identified cointegrating equations were used as error correction term in the ECM. The series forms the error correction variables. The over parameterize ECM was estimated, followed by a step wise reduction of jointly and statistically insignificant variables to obtain the preferred model. The parsimonious result shows that INTR, REER, GOVSIZE and INF are statistically significant in explaining the behaviour of private investment in Nigeria, particularly during the period under consideration. The study recommends policy measures to further reduce the rate of inflation to a single digit to stimulate private investment. Interest rate volatility is a treat to private investment. The apex monetary authority should be cautious in the management of interest rate.

Suggested Citation

  • Baghebo Michael & Eniekezimene A. Francis, 2015. "Macroeconomic Policy Dynamics and Private Investment Behaviour in Nigeria," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 4(3), pages 183-192.
    • Handle: RePEc:rss:jnljee:v4i3p5
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