Estimation of Interest Elasticity Model for Aggregate Commercial Bank Deposits in Nigeria (1986-2008)

Abstract

The Nigerian government deregulated the financial market in 1987 in line with the McKinnon-Shaw financial liberalization paradigm. However, the subsequent policy reversal after the introduction of the structural adjustment programme has made the effect of interest rate on aggregate commercial bank deposits (CBD) mobilized unclear. This study is based on the pioneering work of Egboro (2004) who initially examined the appropriateness of these policy summersaults with data ending in 1999. However, in this present study we re-estimated an interest elasticity model of commercial bank deposits in Nigeria by employing more recent data that captured subsequent changes in the nation’s financial landscape. The econometric technique applied is the two-stage least squares (2SLS) regression method given that the system of simultaneous equations is over-identified. The Statistical Bulletin of the Central Bank of Nigeria constitutes the source of data. Inter alia, the findings indicate that there is an inverse and statistically significant relationship between CBD and deposit interest rates. This relationship is inelastic in the short-run but elastic in the long-run. One of the important implications of the study is that the McKinnon-Shaw financial liberalization paradigm for less developed countries does not hold in Nigeria. Therefore, it may be concluded that there is presently no scope to use the lure of higher deposit rates to significantly stimulate increased commercial bank deposits in Nigeria.