Consumption dynamics, Interest rate behavior and the Euler Equation: Time series evidence for Nigeria

Abstract

The study investigated the Consumption-Interest rate Euler relationship for Nigeria in the periods 1980 to 2015. Applying commonly used vector autoregression (VAR) techniques on annual data obtained for the country, the study found that there exist the Consumption-Interest rate Euler relationship for Nigeria. However, our finding refutes the general assertion of theorist that the substitution effect is always larger (and more workable) in the Euler relationship than the income effect. Our results shows that the consumption Euler equation for Nigeria is consumption-driven, an indication that income effect may be more workable in Nigeria thus crowding out the substitution effect. This was further supported by a uni-directional causality that runs through consumption to interest rate. We recommend, among other things, interest rate policy framework that is flexible to economic needs of the region and motivates saving-dissaving culture of the people and consumptions patterns that is financed by cashless financial products.