Interest Rates and Real Economic Growth in Nigeria: Empirical Investigation from Autoregressive Distributed Lag Model

Abstract

Researchers continue to debate the effect of interest rates on economic growth. While some argue that the high interest hurt the economy and high borrowing cost discourages capital investments, others argue that the moderating effect of high interest rate on inflation leads to a positive real growth in the economy. In the bid to test the effect of interest rate on the economic growth, this study examined the nexus between interest rate and real gross domestic product (GDP) growth in Nigeria. To act as counterbalances, the study also introduced money supply and institutional quality as proxies for interest rate. The research is based on ex-post facto research design using a time series data of 68 quarters from 2006Q1 to 2022Q4). The Autoregressive Distributed Lag (ARDL) model was utilized to assess the effect of interest rate on real GDP growth in Nigeria. The study found that interest rate has long-run significant cointegrating relationship with real GDP growth rate (Adj R2 = 0.44; F-stat (4, 63) = 18.55 p < 0.05). The study concluded that interest rate is a significant factor influencing real GDP growth in Nigeria and that maintaining a stable lending rate is one of the basic requirements for developing countries to attain high level of economic growth. The study thus recommends that as a short-term economic tool, the policymakers may use interest rates to stimulate real growth in GDP in addition to the implementation of appropriate fiscal reforms to stimulate economic activities and support growth.