The Relationship between Interest Rate and Economic Growth in Nigeria: ARDL Approach

Abstract

This study examined the relationship between interest rate and economic growth in Nigeria, using secondary time series data. Data was collected from various issues of the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The study made use of the Augmented Dicker-Fuller (ADF) unit root tests and it was discovered that the variables were not in the same order at level, hence, the use of Autoregressive Distribution Lag (ARDL). The GDP was used to proxy economic growth as dependent variable, while Lending Rate (LR), Exchange Rate (EXC) and Treasury bill Rate (TB) were used as independent variables. It was discovered during the findings that there is a very strong long run relationship among the dependent and the independent variables and the speed of adjustment on equilibrium was set at 79.4%. The result also discovered that there is a negative relationship between the lending rate and the GDP though, statistically insignificant, while positive relationship exists between the GDP, Treasury bill rate and Exchange rate. The paper recommended that the Lending rate has some policy implication on economic growth in Nigeria and the monetary authority should handle it with care and the government should find a way of making the Treasury bill rate more attractive to the investing public.