THE IMPACT OF INTEREST RATE ON DOMESTIC INVESTMENT (1980-2019)
TABLE OF CONTENTS
Title page
Certification page
Approval page
Dedication
Acknowledgement
Abstract
Table of content
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Questions
1.4 Objectives of the Study
1.5 Hypotheses of the Study
1.6 Significance of the Study
1.7 Scope and Limitations of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Literature
2.1.1 The Concept of Interest Rate
2.1.2 The Concept of Investment
2.2 Theoretical Literature
2.2.1 The Classical Theory of Interest Rate
2.2.2 The Loanable Funds Theory of Interest Rate
2.2.3 Keynes Liquidity of Preference Theory of Interest Rate
2.2.4 Accelerator Theory of Investment
2.2.5 Tobin Q Theory of Investment
2.2.6 Keynes Theory of Investment
2.3 Empirical Literature
2.4 Gap in Literature
CHAPTER THREE: METHODOLOGY
3.1 Theoretical Framework
3.2 Model Specification
3.3 Method of Evaluation
3.3.1 Preliminary Tests
3.3.2 Economic Criterion Test (A priori Test)
3.3.3 Statistical Test of Significance
3.3.3.1 Test for Goodness of Fit
3.3.3.2 T-Test of Significance
3.3.3.3 f-test of Significance
3.3.4 Econometrics Test of Significance
3.3.4.1 Autocorrelation Test
3.3.11 Unit Root/Stationary Test
3.3.1.2 Co-integration test
3.3.1.3 Error Correction Model (ECM)
3.4 Data Required and Sources
CHAPTER FOUR:PRESENTATION AND ANALYSIS OF RESULTS
4.1 Unit Root Test
4.2 Cointegration Test
4.3 Regression Analysis
4.3.1 Coefficient Interpretation of the Variables
4.3.2 Coefficient of Determination (R-Squared, R2)
4.3.3 Autocorrelation Test
4.5 Test of Hypotheses
4.6 Implications of the Results
CHAPTER FIVE:SUMMARY, CONCLUSION AND RECOMMENDATION
5.0 Summary of Findings
5.2 Conclusion
5.3 Recommendation
Appendix
ABSTRACT
The relationship between interest rates and domestic investment has attracted the attention of economists and other economic experts. This study conducted an empirical analysis of the impact of the interest rate on domestic investment in Nigeria, covering the period 1980-2016. The data for the study were taken from the statistical bulletin of the Central Bank of Nigeria. The methodology adopted in the study is a multiple linear regression using the method of ordinary least squares (OLS). The results of the study show that the interest rate has a significant negative impact on domestic investment in Nigeria, inflation does not have a significant impact on domestic investment in Nigeria, and the money supply does not have a significant impact on domestic investment in Nigeria. Thus, the recommendation for the study is that the federal Government, through the Central Bank, should stimulate the level of domestic investment by optimally reducing interest rates, and the federal government should ensure favorable and comfortable macroeconomic conditions so that domestic investment can work.
Keywords: interest rate, domestic investment, inflation.
CHAPTER ONE
IMPLANTATION
1.1 Background to the study
The behavior of interest rates largely determines the investment activity and, consequently, the economic growth of the country. Investments depend on the interest rate associated with receiving funds from the market, while economic growth largely depends on the level of investment. According to Jhingan (2003), if the rate is high, the investment is at a low level. A low interest rate leads to an increase in investment. Therefore, it is necessary to promote an interest rate regime that guarantees "cheap" investment costs and, consequently, promotes economic growth at low financial costs.
The interest rate is a critical variable in the debt market, given its role in the effective mobilization and distribution of financial resources. Prior to the adoption of the structural adjustment program in 1986, the Nigerian authorities determined the level and structure of interest rates. The main reasons for regulating interest rates were the desire to obtain social optimality in the flow of resources to the preferred sector; to promote the orderly growth of financial markets; to fight inflation and reduce the burden of servicing public debt. To facilitate the flow of domestic loans to priority sectors, discriminatory and low-market interest rates were established for loans to agriculture, manufacturing and housing construction. In general, this policy entails unintended consequences of moral hazard and unfavorable selection.
The financial sector reforms that began in July 1986 were based on market forces. Its purpose was to eliminate financial repression in order to improve the structure of incentives and ensure the efficiency of resource allocation. The policy orientation of the regulatory authorities was based on the general economic conditions and the evolution of financial markets. In a number of cases, there have been changes in policy caused by the need to solve emerging problems. However, by October 1996, after further liberalization of the financial sector, all forms of interest rate controls were eliminated, as a result of which the minimum lending rate of the Central Bank of Nigeria became the nominal anchor of its interest rate in the flow of bank loans, which averaged 19.8 percent in 1980-1986, 28.6 percent in 1987-1996 and an average of 42.9 percent in 1997-2000, respectively. However, an undesirable consequence of the policy transition from control to liberalization was an increase in interest rates, especially in the period from 1986 to 1993. The interest rate remained relatively stable between 1994 and 1997 and became volatile thereafter (CBN, 2015)
Based on the above, this study aims to conduct an empirical analysis of the impact of the interest rate on domestic investment in Nigeria, covering the period 1980-2016.
1.2 statement of the problem
The impact of the interest rate on determining the level of domestic investment in the economy cannot be overestimated. However, over the years, the interest rate in Nigeria has always fluctuated, and this has negatively affected the level of domestic and foreign investment in the economy. The Government has taken a number of measures to stabilize the level of interest rates in the economy, but these measures and political strategies have proved ineffective in the economy. First, through the Central Bank of Nigeria (CBN), the interest rate was set at several rates to avoid fluctuations and volatility. This was facilitated by the policy of deregulation of interest rates in the economy in 1986. However, despite this policy, the level of interest rates has not been impressively stable, and the level of domestic investment has not increased optimally. Thus, this study focuses on assessing the impact of the interest rate on domestic investment in Nigeria.
1.3 Research Questions
In the course of this study, the following research questions will be considered:
1. To what extent has the interest rate affected the level of domestic investment in Nigeria?
2. To what extent has inflation affected the level of domestic investment in Nigeria?
3. To what extent has the money supply affected the level of domestic investment in Nigeria?
1.4 research objectives
The overall objective of this study is to assess the impact of the interest rate on domestic investment in the Nigerian economy. Specific research objectives:
1. to ensure the impact of interest rate on domestic investment in Nigeria.
2. to evaluate the impact of inflation on domestic investment in Nigeria.
3. to evaluate the impact of money supply on domestic investment in Nigeria.
1.5 Research Hypothesis
The following hypotheses of the study will be tested:
Ho: the interest rate does not have a significant impact on domestic investment in Nigeria
Ho: Inflation does not have a significant impact on domestic investment in Nigeria
Ho: the money supply does not have a significant impact on domestic investment in Nigeria
1.6 the significant of the study
The study draws its relevance from current and potential beneficiaries and their contribution to the academic community as a whole. The relevance of this study is justified by the fact that it will show the impact of the interest rate on domestic investment in Nigeria during the years under review and thus provides a basis for policy prescriptions and interventions. In support of the above, this study will find its relevance as evidence in the following:
The Banking sector: the banking sector will benefit significantly from this study as it will reveal the impact of interest rate on domestic investment in Nigeria. This is due to the fact that the banking sector uses the interest rate as a credit instrument, and this study will show the impact that it has on domestic investment in Nigeria for many years.
Government: The federal Government will find this study very relevant, as it will give an idea of the relative impact of the interest rate on domestic investment and, thus, will motivate the relevant political reforms or livelihoods. This study will also find its relevance in the treasury of analysts of financial variables, given that the topic under study is a purely monetary phenomenon.
Follow-up analysts: This study will also serve as a springboard for researchers who are interested in conducting an empirical analysis of the interest rate concept and domestic investment.
Scientists: students will find this part very relevant, as it will undoubtedly increase their horizon of knowledge about the concept of interest rates and domestic investments.
Academy: The education sector is also considered one of the significant beneficiaries, because it is believed that this study will be an addition to the existing stock of knowledge.
1.7 Scope and limitations of the Study
The main purpose of this study is to conduct an empirical analysis of the impact of the interest rate on domestic investment in Nigeria between 1980 and 2016. During the course of this study, the researcher encountered many limiting threats, including, but not limited to, time constraints, lack of data and some discouraging attitudes on the part of employees of some statistical institutions. However, despite these limitations, the researcher will ensure that the research goals are properly fulfilled and updated.
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