INVESTMENT, OUTPUT AND REAL INTEREST RATE IN NIGERIA: AN ARDL ANALYSIS

Abstract

This paper investigated the impact of Output and Real interest rate on Investment in Nigeria between the years 1981-2014 employing the Autoregressive and Distributed Lag (ARDL) model approach to cointegration. Stationarity of the variables were accounted for using the Augmented Dickey-Fuller (ADF) and the Phillips-Perron (PP) Unit Root test. Our findings reveal the existence of long run relationship among the variables. The result also reveals that in the short run, a one period lag of GDP has a positive and significant impact on Investment while a one period lag of Real interest rate has a negative but no significant impact on Investment. The result also shows that Foreign Direct investment inflow has a positive and significant effect on Investment in the short run while Exchange rate do not have any significant effect on Investment. It is therefore recommended that policies tailored towards the attraction of FDI into Nigeria should be encouraged. Policies which may include the improvement of enabling environment for business, development of critical economic infrastructure and the provision of sufficient power grid for companies. Economic policies should also be implemented in favor of output growth such as policies aimed at increasing aggregate demand which can be achieved through expansionary monetary policies which cuts interest rates in the banking system. Borrowings for investment and consumption rises which also leads to a rise in output which would in turn lead to a further increase in Investment in the country.