Analysis of the Relationship between Interest Rate, Exchange Rate and Economic Growth in Nigeria

Abstract

This study analyses the relationship between interest rate, exchange rate and economic growth in Nigeria spanning from 1980-2022. Data for the study were obtained from World Development Indicators. The study undertook unit root test using the Augmented Dickey Fuller (ADF) method. Consequently, based on the outcome of the ADF result, the research used Auto-regressive Distributive Lag (ARDL) model to determine the existence of a long-run interactive relationship between interest rate, exchange rate, and economic growth in Nigeria. The Auto-regressive distributive Lag (ARDL) bound test result of the long-run interactive relationship between the variables reported the existence of long-run relationship. The study further revealed that the interaction between real interest rate and exchange rate on growth of gross domestic product is negative, but statistically significant both in the long-run and previous period of the short-run. Similarly, the interaction between lending interest rate and exchange rate is negatively related with growth of gross domestic in the long-run. However, deposit interest rate and exchange rate recounted a positive but insignificant interactive relationship. It has been suggested, among other recommendations, that the Central Bank of Nigeria (CBN), should raise deposit interest rate in order to incentivize individuals to save a greater portion of their income. This will enable financial institutions to enhance their capacity to allocate more cash towards investment, thereby fostering economic growth.