GROWTH EFFECTS OF INTEREST RATES, INFLATION AND EXCHANGE RATES IN NIGERIA

Abstract

The paper examines the relationship between inflation, interest and exchange rates on economic growth in Nigeria between 1990 and 2017. Unit root, Johansen co-integration as well as granger causality tests were explored to evaluate the empirical model. The results of findings suggest that all the variables of interest were I(1) series which implies that they are integrated of order one. Further, the Johansen co-integration test reveals a long run co-movement among the variables indicating that interest rates, inflation rates and exchange rates will influence economic growth in the long run. The result of the granger causality test suggests that there is a uni-directional causal relationship between inflation rates, exchange rates and economic growth in Nigeria. The study equally observed that interest rate in Nigeria is growth-repressive. Therefore, there is absolute need for the interest rates to be market-driven in order to attract foreign investment and flows capable of stimulating economic growth in the long run. In addition, the seemingly high interest rate should be reviewed downward so that domestic and foreign investment can be stimulated. Inflation-targeting policies should be pursued with a view to maintaining a single digit inflation rate.