Does the Theory of Interest Rate Parity Hold for Nigeria

Student: Abubakar Alh Abubakar (Project, 2025)
Department of Banking and Finance
Federal University, Dutse, Jigawa State

Abstract

AbstractThis study examines whether the Interest Rate Parity (IRP) theory holds for Nigeria’s financial markets. The theory posits that the difference in interest rates between two countries equals the expected change in their exchange rates, ensuring no arbitrage opportunities. Using empirical data on Nigerian interest rates, inflation, and exchange rate dynamics from 1970 to 2021, the study tests both covered and uncovered IRP conditions. The results reveal significant deviations from the theory, mainly due to market inefficiencies, exchange rate volatility, and capital controls. The findings suggest that while IRP provides a useful theoretical framework, its practical application in Nigeria is limited. The study recommends policy reforms to enhance market efficiency, reduce distortions, and strengthen Nigeria’s integration into the global financial system.

Keywords
theory interest parity nigeria
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