The Impact Of Interest Rate On Domestic Investment

Kamo (2012) found that interest rates have insignificant association with economic growth in Nigeria using OLS regression technique for data analysis. The data was collected from 1987- 2009. On the other hand, Babalola, Oladepo, Danladi, Akomolate and Ajiboye (2015) found that inflation and interest rate have a negative effect on economic growth using 1981-2014 as the study period with data collected from the Central Bank of Nigeria. A negative effect of interest rates on economic grown in Kenya was obtained in the study conducted by Mutinda (2014) who collected data from the Central Bank of Kenya using the period 2003-2012. This study used the leading rate as a proxy for interest rate. The study also used GDP as the dependent variable with multiple regression analysis as its major technique of data analysis to arrive at the findings stated above.

Abdul and Marwan (2013) investigated the effect of interest rate, inflation rate, and GDP on real economic growth in Jordan over the period 2000-2010. Unit root test (Augmented Dickey-Fuller test) has been exploited to check the integration order of the variables. A cointegration analysis with four variables (economic growth, interest rate, GDP, and inflation level) is employed. Study adopted Johansen test. Findings indicated that both trace test and max eigen-value static showed that the four equations have significant existent 1% or 5%. It means that all variables have long term equilibrium relationship. Study adopted the same four variables to discuss Granger Causality relationship; findings indicated that inflation causes interest rate. On the other hand all other variables are independent with each other. Regression was conducted to test growth rate with interest rate which showed that current interest rate has an influence power on growth rate. Also, regression used to test growth rate with inflation rate; it showed that inflation rate has influence power on growth rate. Finally regression used to test GDP, interest rate, and inflation rate together; results have shown that current GDP and one lag GDP have influence power to growth rate.

Hitlar (2012) investigated 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.

2.4 Gap in Literature

It can be clearly seen that there is an avalanche of studies on the effect of interest rate on selected macroeconomic variables. However, one can clearly see that majority of the studies are anchored on estimating the impact of interest rate on economic growth. There are few studies on the impact of interest rate on investment. This study is therefore focused on analyzing the impact of interest rate on investment in Nigeria.