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The Relationship between Interest Rate and Economic Growth in Nigeria: An Error Correction Model (ECM) Approach

Author

Listed:
  • Lyndon M. Etale

    (Department of Finance and Accountancy, Faculty of Management Sciences, Niger Delta University, Wilberforce Island, Bayelsa State, Nigeria)

  • Peter E. Ayunku

    (Department of Finance and Accountancy, Faculty of Management Sciences, Niger Delta University, Wilberforce Island, Bayelsa State, Nigeria)

Abstract

This study examined the relationship between interest rate and economic growth in Nigeria, using secondary time series panel data for the period 1985 – 2014. Data was collected from various issues of the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The study employed Augmented Dicker-Fuller (ADF) unit root tests as well as Johansen co-integration test followed by Error Correlation Model (ECM) approach. The ADF unit root test results indicated that the variables are all stationary at first difference. The variables were integrated of order one (1) which implies that the null hypothesis of non-stationary for all the variables of interest is rejected. The Johansen co-integration test result revealed the existence of two co-integrating relationship between the variables at 5% level of significance. The study proceeded to perform the ECM approach and found that interest rate is inversely related to economic growth, but the relationship is statistically insignificant. The recommended that monetary authorities should adopt appropriate polices that would promote and stimulate economic growth in Nigeria.

Suggested Citation

  • Lyndon M. Etale & Peter E. Ayunku, 2016. "The Relationship between Interest Rate and Economic Growth in Nigeria: An Error Correction Model (ECM) Approach," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 2(6), pages 127-131, 06-2016.
    • Handle: RePEc:arp:ijefrr:2016:p:127-131
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    References listed on IDEAS

    as
    1. Okoh Johnson Ifeanyi & Nkechukwu Gabriel Chukwu, 2014. "The Nexus of Interest Rate Deregulation and Economic Growth in Nigeria," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 3(3), pages 142-151.
    2. di Giovanni, Julian & Shambaugh, Jay C., 2008. "The impact of foreign interest rates on the economy: The role of the exchange rate regime," Journal of International Economics, Elsevier, vol. 74(2), pages 341-361, March.
    3. J.O. Adeniran & S.A. Yusuf & Olatoke A. Adeyemi, 2014. "The Impact of Exchange Rate Fluctuation on the Nigerian Economic Growth: An Empirical Investigation," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(8), pages 224-233, August.
    4. Abdul Aziz FaridSaymeh & Marwan Mohammad Abu Orabi, 2013. "The Effect of Interest Rate, Inflation Rate, GDP, on Real Economic Growth Rate in Jordan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(3), pages 341-354, March.
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