Abstract:

This paper tests the endogenous theory that in open economies, domestic interest rate may elude the capacity of developing economies to fathom. The study applies the fully modified ordinary least square to examine the rational expectation theorem on Nigeria’s long-term interest rate sensitivity to the Fed fund rate, while trade openness, exchange rate, inflation expectation, public debt ratio, and bank competitiveness are control variables, from 1970 to 2017. Data was obtained from the World Bank Indicators and Central Bank of Nigeria statistical bulletin, and the result reveals that domestic interest rate has negative short-run and long-run sensitivity to the US Fed fund rate and trade openness, while it is significantly sensitive to inflation, exchange rate and public debt ratio. Policy recommendations are provided.