The Impact of Interest Rates on the Development of an Emerging Market: Empirical Evidence of Nigeria
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Date
2013
Authors
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Journal ISSN
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Publisher
Journal of Economics and Sustainable Development
Abstract
The study reveals that interest rate is always difficult to forecast. Interest rates will probably rise with the
removal of public sector funds from the industry. The interest rate (MPR) is the rate at which banks borrow from
Central Bank to cover their immediate cash shortfall. The higher the cost of such borrowing, the higher also will
be the rate banks will advance credit to the real sector. However, in the long-term, with re-capitalization on
banks, insurance companies’ e.g. could begin to exploit economies of scale to compete on pricing and improve
their deposit mobilization capabilities, which could positively affect interest rates. The Central Bank of Nigeria
(CBN) has not formulated a model that will reduce interest rate, inflation and stabilize the exchange rate.
However, a time series analysis was adopted for 40 years (1970- 2010).The Error Correction Modelling (ECM)
was adopted to reconcile fluctuations or changes both in the short and long run between the variables. The result
shows that due to the ability to estimates the parameters of Error Correction Mechanism (ECM), which is
generally consistent, sufficient, significant and negative. The non-zero coefficient of ΔINTt and INFt in both
ways, if statistically significant, will indicate a short-run causality from ΔINTt to ΔGcft as well as ΔINFt to
ΔGDPt. The paper recommends that pragmatic approach needs to be adopted to ensure that the lending rates are
reduced to single digit in order to reduce production cost, high unemployment rate and encourage Foreign Direct
Investment (FDI). The monetary policy rate (MPR) at 12% (CBN, 2013) is too high for a developing economy
such as Nigeria because it will have a negative impact on the naira exchange rate. Monetary and fiscal policies
remain necessary and sufficient conditions for attaining a realistic interest rate performance. Interest rate
management in a depressionary economy needs regular fine-tuning of relevant instruments by the monetary
authorities
Description
Staff Publication
Keywords
Interest rate,, Capital formation,, Inflation,, Monetary and fiscal policy,, Central bank.