Effect of Interest Rate on Investment Determination in Nigria

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EFFECT OF INTEREST RATE ON INVESTMENT
DETERMINATION IN NIGERIA (1970-2008)

ABSTRACT
This study examines the effect of interest rate on investment determination in Nigeria. The study is necessitated by the fact that the behavior of interest rates to a large extent determines investment activities and economic growth of any country. Investment decision is seen as demand for credit in an economy and this study calculated the annual variance of interest rate and its effects on investment determination. This research made use of OLS technique in estimating the model and also extracted data with regards to the period 1970-2010 from the Central Bank of Nigeria (CBN) annual report and statistical bulletin of 2008.

The research showed that interest rate played a negative role in investment determination in the economy. It also deduced that other variable such as economic stability, debt burden, shortage and lack of infrastructure, foreign exchange affect domestic investment. Improvement in these key macroeconomic variables is a necessary condition towards facilitating investment in Nigeria. This research work is above all a forward looking exercise intended to draw lessons for the strategic positioning of the economy as the government of Nigeria consolidates its transition to democracy.

TABLE OF CONTENTS
TITLE PAGE--------- i
APPROVAL PAGE -------- ii
DEDICATION -------- iii
ACKNOWLEDGEMENT ------- iv
ABSTRACT --------- v
TABLE OF CONTENTS - ------- vi

CHAPTER ONE: INTRODUCTION
1.1Background of the study - ---- - 1
1.2Statement of the problem ------ 3
1.3Objectives of the study ------ 5
1.4Hypothesis of the study ------- 6
1.5Significance of the study ------ 6
1.6Delimitation of the study ------ 7
1.7Definition of terms ------- 7

CHAPTER TWO: LITERATURE REVIEW
2.1Theoretical Literature -------9
2.2Empirical Literature -------20
CHAPTER THREE: RESEARCH METHODOLOGY
3.1Introduction --------25
3.2 Model Specification -------26
3.2.1Definition of Model Variables ------27
3.2.2Estimation Procedure - ------28
3.3Technique of Evaluation - ------29
3.3.1Economic Tests --------29
3.3.2Economic Criteria - -------30
3.3.3Statistical Tests - -------30
3.3.4Econometric Tests - ------31
3.4 Battery Tests --------32
3.5 Nature And Sources------33

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1Presentation and Analysis of Results - ----34
4.1.1Interpretation of Results -------35
4.1.2Evaluation of Regression Estimate - ----35
4.2Evaluation Based On Economic Criteria - ---36
4.3Evaluation Based On Statistical Criteria (First Order Test)-37 4.4Evaluation Based On Economic Criteria (Second Order Test) -40

CHAPTER FIVE: SUMMARY, POLICY RECOMMENDATION
AND CONCLUSION
5.1Summary Of Finding ------47
5.2Policy Recommendation ------48
5.3Conclusion --------49
BIOGRAPHY --------51

CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
The role of interest rate in the determination of investment and hence economic growth in Nigeria has been a matter of controversy over a long period of time. Yet, what constitutes an appropriate interest rate policy still remains to be a puzzling question. Until the early 1970s, the main line of argument was that because the interest rate represents the cost of capital, low interest rates would encourage the acquisition of investment and promote economic growth, a notion consistent with the Keynesian and neo-classical analysis. This promoted many countries to impose interest rate ceilings at below market clearing levels. Interest rate is a prominent feature of any economy. Interest rate change in response to a variety of economic events such as change in...
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