Determinants of interest rates in Nigeria: An error correction model

Abstract

SUMMARY AND CONCLUSION The goal of this paper has been to examine the influence and relative importance of various domestic and foreign factors in the determination of interest rates, particularly the Treasury Bill Rate (TBR) in Nigeria. Using a sample of quarterly observations from January 2000 to April 2008, analyzed by descriptive and econometric tech-niques. Evidence from this study shows that the series of TBR in Nigeria and its hypothesized determinants are generally I(1) series. Johansen (1992, 1995) system based co-integration tests revealed that two (2) co-integrating equations (CE) exist between linear combina-tions of the series. Results based on normalization of the restricted Vector Autoregressive (VAR) system in respect of TBR and real outputs, with two CE imposed, revealed that increase in real money supply (RMS) and expected foreign returns (EFR) exert significant (p<0.01) and negative influence on TBR, while simultaneously exerting significant (p<0.01) and positive influence on domestic outputs in the long-run. This shows that the performance of the domestic economy is better enhanced in the long-run, when government’s monetary and exchange rate policies are targeted at enhancing RMS, promoting reasonable depreciation of Naira relative to other foreign currencies and in the process, lowering the TBR in Nigeria. Evidence based on the short-run component of the estimated Vector Error Correction Model (VECM) and the associated variance decomposition, revealed that the equilibrium relationship between TBR and its determi-nants is stable, exogenous shocks due to TBR being corrected within 1.04 quarters (92 days), while those due

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 11 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.