INVESTIGATING THE RELATIONSHIP BETWEEN STERILIZATION POLICY AND INTEREST RATES IN NIGERIA: A TIME SERIES ANALYSIS

Abstract

The increasing inflow of capital into the Nigerian economy has necessitated the adoption of sterilization policy as a means of neutralizing the monetary impact of reserve inflows. This study analyzed the effectiveness of sterilization policy on interest rates in Nigeria by examining the impact and implications of the policy on the economy. Using monthly series from 2010 to 2021, the study employed the autoregressive distributed lag (ARDL) technique to determine the short-run and long-run effects of sterilization policy on interest rates. The findings show that sterilization policy initially leads to a rise in interest rates, but after a lag, the policy causes a decrease in interest rates. In the long-run, sterilization policy leads to an increase in interest rates. The study also identified a negative relationship between money supply and interest rates both in the short-run and long-run. Furthermore, the study found that exogenous variables significantly influence the interest rates. The authors, therefore, recommended the adoption of measures to cushion the effects of unsustainable capital inflows in the economy and factoring in exogenous variables when determining a desirable interest rate in line with the economic reality.