Effect of Selected Macroeconomic Variables on Aggregate Investments in Nigeria

Abstract

This study investigated the influence of selected macroeconomic variables such as exchange rate, interest rate, and inflation rate on aggregate investment in Nigeria. Using gross fixed capital formation (GFCF) as an indicator for the measure of investment performances, the study used annual time series data which were mainly obtained from the CBN statistical bulletin. The autoregressive distributed lag (ARDL) technique was employed in this study to estimate the relationship among the variables in short run and long run. According to the bounds test, the result showed that there existed a long run cointegration relationship between the selected macroeconomic variables and aggregate investment in Nigeria. It is found that the exchange rate had positive and significant effects on investment. This means that a stable exchange rate would promote investments. On the contrary, the lending rate was found to have negative and significant effects on investment, which means that when borrowing cost is high, then investment will be discouraged. Also, inflation has a slight positive effect on investments. From the error correction model, there was evidence to show that the deviations from the equilibrium process is corrected to some degree along the long-run equilibrium path with the error correction parameter having a value of –0.63. The diagnostic test results revealed no presence of serial correlation and heteroskedasticity. On this basis, therefore, the study infers that macroeconomic stability such as exchange rate stability, moderate interest rate, and low inflation rates are essential for promoting aggregate investments in Nigeria.