Abstract

This study examines variations in interest rate and investment determination in Nigeria. The study is necessitated by the fact that previous studies only examined the effect of interest rate on investment determination without accessing the bi-casual effects of these macroeconomic variables. Investment decision is seen as demand for credit in an economy and this study calculated the annual variance of interest rate from monthly interest rate data for the period 1970-2002 and examines the determinants of interest rate variation and its impact on investment determination. The study employed dynamic model of two equations using instrumental variable technique of estimation. Data for the study were extracted from the World Development Indicator. The study revealed that variation in interest rate played a negative and highly significant role in investment decision in the economy and demand for credit also had negative and significant influence on interest rate variations in both the short run and long run. Although, the study deduced that investment has an indirect relationship with interest rate variation, other variables such as debt burden, economic stability, foreign exchange, shortage and lack of infrastructure affect gross domestic investment. Improvement in these key macro-economic variables is a necessary condition towards facilitating investment in Nigeria.