Abstract

The paper investigates the relationship between interest rates and economic growth in Nigeria, using time series analysis and annual data from 1970 - 2006. The co-integration and error correction model were used to capture both the long-run and short-run dynamics of the variables in the model. The empirical results indicate that real lending rates have significant effect on economic growth. There also exists a unique long-run relationship between economic growth and its determinants, including interest rate. The results imply that the behaviour of interest rate is important for economic growth in view of the relationships between interest rates and investment and investment and growth. Thus, the formulation and implementation of financial policies that enhance investment-friendly rate of interest is necessary for promoting economic growth in Nigeria.

Key words: Interest rates, economic growth, financial reforms.