How Interest Rates Affect Investment Behavior In Nigeria’S Financial Markets
Emmanuel Chijioke Nnamdi
Department of Economics, Rivers State University, Port Harcourt, Nigeria
Grace Oluchi Ibekwe
Department of Economics, Rivers State University, Port Harcourt, Nigeria
Abstract
The study examined the impacts of interest rate on investment decision in Nigeria. The study specifically found out the impact of deposit interest rate, exchange and inflation rate on investment decision in Nigeria. The study had 3 research questions and 3 hypotheses. The study adopted the descriptive research design. Data used covered a period of 32 years (1990-2022). Data for the study were collected from the World Development Indicators website for Nigeria. The study adopted method of maximum likelihood in our estimations. Evaluations of results are based on two criteria, namely, economic criterion – a priori behavior of the parameters and their economic implications and statistical criterion – use of R2, F, and t- statistics to test the explanatory power of the estimated parameters. While Eviews version 7.0 was the software package used for the estimations. The results of the study showed that interest rate is a significant determinant of investment decision in Nigeria. This should be expected as the cost on capital plays major role in investment decisions and the prospects of investment in most economies. The finding shows that there exists a comparison between interest rate behavior and investment decision in Nigeria as we have in China. Hence, there is no difference in the impact of interest rate on investment decisions during the period in both countries. Finally, the result of the cointegration shows that there’s a long run relationship which makes investment responds negatively to shocks arising from interest rate and positively in the short run as seen in the study. Hence, any change in these variables exerts positive influence on investment. It was concluded that deposit interest rate, exchange rate as well as inflation rate and investment have a significant and positive relationship. Therefore, it was recommended that monetary authorities should promote policy that will improve deposits and also make available loanable funds to encourage investment. Monetary authorities should make policies which would help to boost the saving culture of the people. This could be done by increasing the deposit rate which would lure the people to deposit their money in banks thereby increasing the supply of loanable funds. This would lead to a fall in interest rate and eventually rise in investment.