Macroeconomic Determinants of Investment Dynamics in Nigeria: Evidence from Cointegration and Fully Modified Least Squares Estimation

Abstract

Macroeconomic conditions affect investment by affecting the rate of financing cost, price stability, exchange rate conditions, economic activity and public expenditure. In this study, the long run relationship between investment and inflation, interest rate, exchange rate, economic growth and government expenditure in Nigeria is examined. The 45 observations of annual time series data were analysed with the Augmented Dickey Fuller unit root test, the bounds testing approach to cointegration and Fully Modified Ordinary Least Squares estimation. The unit root tests yield a mix of I(0) and I(1) variables with investment, exchange rate, and government expenditure being integrated of order one, and inflation and economic growth being stationary at level. The number of interest rates is held fixed at 10 percent significance level. The F test yields an F statistic of 4.145917, which is greater than the upper critical value of 3.38 at 5 percent significance level, thus implying the presence of long run relationship between the variables. According to estimates from the FMOLS, the relationships of interest rate and exchange rate with investment are positive and statistically significant and that of government expenditure is negative and statistically significant. There is a negative but not statistically significant relationship between inflation and investment, while there is a negative and statistically significant relationship between economic growth and investment at the 10 percent level, but not at the 5 percent level. The results suggest a link between the monetary sector, external sector, fiscal and economic activity conditions with the investment dynamics in the long run in Nigeria.