Benue State University, Makurdi

STATE SPACE MODELLING AND KALMAN FILTERRING OF INTEREST RATE IN NIGERIA: IMPLICATIONS FOR INVESTMENT

AKIGHIR, DAVID TERFA AND IOREMBER, PAUL TERHEMBA

Abstract

The volatile nature of interest rate in the Nigerian economy has informed various interest rate policies and regimes to ensure its stability with a view to enhancing investment in the country. Yet, it is not certain whether interest rate would be investment friendly to galvanize investment in the nearest future. This study has employed the state space modeling and the kalman filtering approaches to ascertain the likely behavior of interest rate in Nigeria up to 2020. Quarterly data on interest rate spanning from 1999Q1 to 2013Q4. The out-of-sample forecast of interest rate showed that from 2014Q1 to 2020Q4 interest rate in Nigeria will hover around an average of 18%. It was concluded that this level of interest rate is not investment friendly, and if efficient interest rate policies are not put in place, investment would be adversely affected especially that of small and medium scale enterprises. The paper recommended that the Central Bank should reduce lending rate to commercial banks and the government should provide infrastructure such as stable electricity supply so as to reduce the cost of doing business of commercial banks in the country.

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