Abstract

This paper analyzes the determinants of interest rate in Nigeria within the framework of a Vector Error Correction Model (VECM), using quarterly data between first quarter of 2000 and last quarter of 2008. The study found that the Treasury Bill Rates (TBR) in Nigeria and its hypothesized determinants are generally I (1) series, with two cointegrating equations existing among their linear combinations. Results based on normalisation of the restricted VAR system in respect of the TBR and real GDP revealed that Real money supply (RMS) and Expected Foreign Returns (EFR) exerts significant (p<0.01) long-run influence on both the TBR and domestic outputs. The equilibrium relationship was found to be stable, with exogenous shocks due to TBR being corrected within 92 days, while those due to real output are corrected within 4-days. In general, rising domestic outputs and past quarters’ TBR leads to significant increases in current TBR in Nigeria, while increase in past quarters’ RMS cause current TBR in Nigeria to decline. Overall, real GDP accounts for as much as 37.4% of the variation in TBR after 5 quarters (15 months), while RMS and EFR accounted for 8.41 and 4.48% of variation in TBR in the same period.

Key words:  Interest rate determination, vector error correction model, Nigeria.