Interest Rate Volatility And Macroeconomic Stability In Nigeria

Abstract

This study explores the implications of interest rate volatility on macroeconomic stability in Nigeria from 1990 to 2024, focusing on inflation, exchange rate, and investment dynamics. The objectives are to analyse the volatility behaviour of interest rate; assess its effects on inflation, FDI, and exchange rate stability, and to identify causal relationships among these macroeconomic variables between 1990 and 2024. The econometric analytical method was applied including the Augmented Dickey–Fuller (ADF) tests, Johansen cointegration, Vector Autoregression (VAR) model, Correlation analysis, Granger Causality Test and Impulse Response Function (IRF). The result revealed Vector Autoregression (VAR) model with an optimal lag of two shows significant short-run interactions, with interest-rate innovations exerting measurable effects on inflation and GDP growth. Granger causality tests further reveal that interest rates significantly predict inflation (p = 0.0006) and GDP growth (p = 0.0007), while the impact on FDI is borderline significant (p = 0.056). No significant causality is detected from interest rate to exchange rate (p = 0.7949). Impulse response functions (IRFs) show that interest-rate shocks generate short-run increases in inflation and persistent dampening effects on GDP growth, while FDI responds weakly to monetary shocks. This study concluded that interest-rate volatility is a major source of macroeconomic instability in Nigeria, primarily through its strong transmission to inflation and growth, with limited influence on exchange-rate movements and long-term investment inflows underscoring underscore the need for a more credible monetary framework and structural reforms to reduce volatility and strengthen Nigeria’s macroeconomic resilience. This study recommended that the Central Bank of Nigeria should adopt a more predictable and rule‑based monetary policy framework to reduce volatility and strengthen policy credibility as forward guidance would help anchor expectations. Also, strengthening regulatory transparency, infrastructure, and macroeconomic policy stability. Improve security and ease of doing business to encourage long‑term FDI inflows.