Percieved Relationship between Exchange Rate, Interest Rate and Economic Growth in Nigeria: 1970-2010

Abstract

This study was specifically embarked upon to establish empirically the relationship exiting among Exchange rate, Interest rate and economic growth in Nigerian economy over the period of 1970-2010. Fundamentally, the period of the study was fractured into two prominent distinctions of economic era - the regulation era and the deregulation era. The study adopted vector auto- regression (VAR) technique, with specific emphasis on Impulse Response factor and the Forecast Error Variance Decomposition. The result indicated that Exchange rate had a stronger impact on Economic growth than Interest rate. Particularly, Interest rate impact was found to be positive but however declined as the time horizon increased. It had a little impact on Economic growth in the period of regulation than in the deregulation era. The conclusion arising from the study shows that Exchange rate liberalization was good to Nigerian Economy as it promotes Economic growth. Interest rate liberalization on the other hand does not make an appreciable impact on the Economic growth as it undermines investment drive. The paper therefore recommends that Interest rate liberalization and deregulation should be replaced with the policy of Interest rate regulation as obtained in the 1970s and early 1980s.