The Effects of Inflation and its Risk on Interest Rate: An Empirical Evidence from Nigeria

Abstract

The paper examines the effects of inflation and its risk on interest rate in Nigeria. The data sets cover the period of 1995:M1 to 2014:M12. ARCH (1) and GARCH (1, 1) were used to measure inflation risk and the result indicates that GARCH(1, 1) measures inflation risk better than ARCH(1) model based on Schwarz Information Criterion (SIC), and adopting multiple regression method, the result reveals that inflation and inflation risk exact negative and positive impacts on interest rate respectively, but none is significant. This result implies that the direction of this interest rate by monetary policy rate (MPR) is not proactive enough to curb the rising inflationary pressure in Nigeria. Hence, there is a need for more proactive monetary policy rate that can cut back the rising inflationary pressure.