ABSTRACT
The paper investigated the relationship between public domestic debt and
interest rate in Nigeria using data from 1981Q1 to 2018Q4. Applying the
Autoregressive Distributed Lag (ARDL) bound test, we confirmed the existence
of a long run relationship among the model variables; namely interest rate,
domestic debt, money supply and capital inflows. The results affirm the positive
and significant effect of domestic debt on interest rate in Nigeria. Therefore,
managing the growth of domestic debt is pertinent in moderating the high
interest rate The empirical impact of money supply on interest rate was found to
be in line with theoretical expectation. However, the variable of foreign capital
inflow was found to be positively related to interest rate against expectation.
This imples that the inflows have not been large enough to make a dent on
market interest rates. The error correction term was found to be significant and
indicating that 16.4 per cent of the disequilibrium will be dissipated before the
next period, which, in order words is the speed at which the interest rate will
return to its long-run equilibrium following changes in domestic debt, money
supply and foreign capital inflow in the short-run. The paper concludes that
given the significant effect of public domestic debt on market interest rate,
continuous borrowing from the domestic market by government would have the
adverse effect of keeping interest rate high, which can be a disncentive to private
investment. The paper also suggest the optimisation of heterodox approach in
managing liquidity to influence interest rate downward, given the significance
of money supply, with eye on price stability.
Key words: Interest rate, Public Domestic debt, Capital Inflows, ARDL
JEL classification: C51, E43, E62, H63
Yusuf, Dauda Bulus