International Journal of Economics and Financial Issues The Effects of Interest and Inflation Rates on Consumption Expenditure: Application of Consumer Spending Model

Abstract

Using modified consumer spending model and data that span the period of 1981-2011, the study examines the effects of interest and inflation rates (proxy-consumer price index) on consumer spending. The study extended its investigation into the causal relationship between consumer spending (proxy; private consumption expenditure [PCE]), interest and inflation rates using granger causality Wald test, so as to ascertain if consumer spending can be use to predict future interest and inflation rates in the economy. The findings suggest that all explanatory variables account for approximately 93.38% variation in consumer spending, indicating interest and inflation rates and other control variables such as per capita income, indirect tax and savings as important determinants of PCE in Nigeria. The results on the granger causality indicated that future interest and inflation rates cannot be predicted using PCE. Therefore, based on these findings, we recommend expansionary fiscal and monetary policies to influence the level of aggregate demand in the economy.

Full text

International Journal of Economics and Financial
Issues
ISSN: 2146-4138
available at http: www.econjournals.com
International Journal of Economics and Financial Issues, 2018, 8(4), 32-38.
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018
32
The Effects of Interest and Ination Rates on Consumption
Expenditure: Application of Consumer Spending Model
Charles O. Manasseh1*, Felicia C. Abada2, Jonathan E. Ogbuabor3, Josaphat U. J. Onwumere4,
Chinasa E. Urama5, Okoro E. Okoro6
1Department of Economics, Coal City University Enugu, South-East, Nigeria, Nigeria, 2School of General Studies, Social Science
Units, University of Nigeria Nsukka, Nigeria, 3Department of Economics, University of Nigeria Nsukka, Nigeria, 4Department of
Banking & Finance, University of Nigeria, Enugu Campus, Nigeria, 5Department of Economics, University of Nigeria Nsukka,
Nigeria, 6Department of Banking & Finance, University of Nigeria, Enugu Campus, Nigeria.*Email: charssille@gmail.com
ABSTRACT
Using modied consumer spending model and data that span the period of 1981–2011, the study examines the effects of interest and ination rates
(proxy - consumer price index) on consumer spending. The study extended its investigation into the causal relationship between consumer spending
(proxy; private consumption expenditure [PCE]), interest and ination rates using granger causality Wald test, so as to ascertain if consumer spending
can be use to predict future interest and ination rates in the economy. The ndings suggest that all explanatory variables account for approximately
93.38% variation in consumer spending, indicating interest and ination rates and other control variables such as per capita income, indirect tax and
savings as important determinants of PCE in Nigeria. The results on the granger causality indicated that future interest and ination rates cannot be
predicted using PCE. Therefore, based on these ndings, we recommend expansionary scal and monetary policies to inuence the level of aggregate
demand in the economy.
Keywords: Consumer Spending, Ination Rate, Interest Rate, Granger Causality
JEL Classications: D11, D12
1. INTRODUCTION
After years of destitute governance and contradictory policies
under the military government, Nigeria experienced enhanced
growth when the country returned to civilian rule in 1999; this
marked the turning point for Nigeria. The new dawn has been
attributed to incessant effort of the authorities and the policy
makers in transforming the economy with particular attention
to scal and monetary policy. According to National Bureau
of Statistics (NBS), Nigeria economy has been growing at an
impressive rate of 6.5% since 2003 as against 2.8% recorded
in the 1990s, with a whopping drop of ination rate from 26%
to 9% in December 2006. From 2006 until February 2014,
ination rate in Nigeria averaged 10.38% reaching an all time
high of 15.60 Percent in February of 2010. In like manner,
foreign reserves also grown from $4 billion in 1999 to $43.5
billion as at December 2006, even after paying $14 billion to the
Paris and London club with huge debt relief of $33 billion. As
a matter of fact, in December 2013 the Nigeria foreign reserve
got to its peak at $48.86 which has so far dipped by 6.77%
since the beginning of the 2014. Consequently, the implied
persistent improvement in the performance of the economy
indicated by the statistics and growth rate of real gross domestic
product (GDP) illustrated in Figure 1 expected to translate to
improvement in the living standard of the households. To the
greatest dismay, as the real GDP grows, the unemployment
rates even grow faster.
In 2011, NBS report show an increasing growth rates of 6.64%,
7.72%, 7.40% and 8.68% in the 1st, 2nd, 3rd and 4th quarter of
the year respectively with unemployment rate of 23.9%. Also,
World Bank Standard 2012 has it that almost 100 million people
in Nigeria leave on less than US$ 1.25 per day despite its alleged
growth. Apparently, it is understood that consumption expenditure

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018 33
plays a central role in macroeconomic activity affecting both
short-run business cycles and long-run economic growth. The
motivation behind consumption expenditures is the general process
of consumption, which is the use of goods and services to satisfy
human needs. Increase in private consumption expenditures (PCEs)
as a measure of consumer spending invariably means reduction
in the cost of living and improvement in standard of living
(AmosWeb, 2014, March 2nd). Therefore, it is almost impossible
for a reasonable growth in an economy without a corresponding
increase in consumer spending. Thus, for a sustainable growth
in the country, the need for articulated policy options geared
towards promoting consumers spending should not be neglected
because, the stimulation of consumers spending always means
the stabilization of the economic environment. Therefore, a low
interest and ination rates could intensify borrowing and spending
through the evaluation of purchasing power of the households and
lowering the cost of borrowing to improve the standard of living
of the people.
However, even in the presence of the recorded growth which has
not been impressed, consumers spending have been threatened by
high ination rate mostly measured with consumers’ price index
(CPI). As the annual percentage changes in the price level of basket
goods and services purchased by households, it also serves as a
measure of the real values of wages, salaries and pensions. Be
that as it may, in 2004 the CPI in Nigeria averaged 97.43 index
points, which reaches an all time high points of 152.30 in 2013.
In January 2014, it increases from 152.30 to 153.30 index points
(NBS, 2014). In addition, further survey on consumer price index
(CPI) shown in Figure 2 also reveals a persistent increase in the
prices of all items. Thus, continues increase in CPI over the year
undermines the consumers spending by reducing the purchasing
power of their income.
Hence, the understanding of CPI and its inuence on consumer
spending plays a signicant role in the growth of every economy
and maintenance of the standard of living of the households. It is
obvious that an economy that has recorded persistent lower CPI
inversely depict healthy economic environment which signies
growth (Seabury, 2011). Consequently, it equally shows the
veracity of the economy and also serves as an incentive for both
local and foreign investors. Therefore, a persistent rise in the CPI
amidst the improvement in real GDP should be a source of worry
to policy makers in Nigeria because; they constitute a very useful
tool for economic planning and help to understand the degree of
economic stability (Seabury, 2011).
Similarly, the lower the interest rate (INTR), people become
eager to borrow money for investment purposes and to make
large purchases. This implies that when consumers pay less in
interest, it encourages them to nance more businesses due to
the low cost of borrowing or make more purchases, which may
in turn create a ripple effect of increased spending throughout
the economy. Thus, higher INTRs translate into cutting spending
because consumers may not have as much disposable income for
more spending. Therefore, higher INTR together with increased
lending standards discourages spending hence the high cost of
borrowing. This affects not only consumers but also businesses
and the rate of production (Seabury, 2011).
Sources: Author’s Concept
Figure 1: Real gross domestic product in Nigeria – real gross domestic product - (2000–2011)
Figure 2: Consumer price ındex (2009–2013)
Source: Author’s Concept

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018
34
The impacts of high interest and ination rates have overtime exert
negative inuence on consumption expenditure and the economy
in general. It should be noted that the consumption pattern of a
country depicts the aggregate demand of goods and services in the
country, and in most cases it constitutes about 60% of the total GDP
of the country. It also represents the level of welfare and poverty
that a nation is experiencing (HNLSS, 2009/2010). However, from
Figure 3, it was noticed that consumption expenditure from 2000
to 2011 is almost horizontal, implying poor spending habit by
household due to the ugly inuence of high interest and ination
rates which resulted to a high cost of borrowing and fall in the
purchasing power of the household. It is obvious that increase in
either of the instrument most likely have direct effect on consumers
spending by reducing current consumption through the altering of
the disposable income of the household (Ndou and Ncube, 2011).
In a situation like this, the outcome of low investment activities
and decline in production due to fall in aggregate demand for
goods and services could result to unemployment, low per-capita
income and poor standard of living.
Having viewed this challenge a constraint to economic growth and
welfare of the citizenry, the government authorities and Central
Banks of Nigeria (CBN) Monetary Policy Committee (MPC), in
their effort opted for the reposition of the economy through the
review of the past monetary policy instruments. From the review,
moderation inationary pressure, which began in the fourth quarter
of 2012 and continued in 2013, was observed. The year-on-year
headline ination fell consistently from 9.0% in January to 8.6%
and 8.4% in March and June, respectively, before ending the year
at 8.0 per cent. Also, food ination, which constitutes 51.8% of
the CPI basket, declined from 10.1 per cent in January to 9.5, 9.6,
9.4 and 9.3% in March, June, September, and December 2013,
respectively. However, it was also observed that core ination
initially declined to 7.2 and 5.5% in March and June from 11.3%
in January, but rose during the second half of the year to 7.4 and
7.9% in September and December, 2013, respectively (Sanusi,
2014). Since the moderation in domestic price level was largely
due to the tight monetary policy stance in 2013, resulting to single
digit ination for the whole year, the committee, thought it wise
to re-introduce the monetary policy rate (MPR) of 12 percent
which was also adopted in 2011 and 2012 with the asymmetric
corridor of interest rate (INTR) remaining at ±200 points basis
in 2014 as a way to restrain the challenges facing domestic and
international economic development in Nigeria. To inuence the
country’s borrowing and INTRs, 12% cash reserve ratio (CRR)
on private sector deposits is maintained with increase from 50%
in 2013 to 75% CRR on public sector deposits to enhance the
availability of fund for commercial banks to make loans (CBN,
2014) so as to strengthened investment spending. While the
liquidity ratio remains at 30% of total assets, net open position of
1.0% of shareholders’ funds was initiated.
Therefore, considering the reintroduction of tight monetary
policy (12% MPR) and the increase from 50% to 75% CRR on
public sector deposits as well as the ongoing policy reforms in the
economy currently to address the challenges facing consumption
expenditure, this study intend to provide a preliminary evidence
on the inuence of interest and ination rates on consumption
expenditure and also, investigate the causal relationship between
them. Given the signicance of interest and ination rates in
an economy, several empirical investigations (e.g. Audu, 2012;
Onodje, 2009) have been conducted to unravel the complexities
on the need to maintain a moderate interest and ination rates
and its implications on consumer’s spending. This paper differs
from other studies in Nigeria in various ways; (a) the model for
the study was built on the framework of Keynes (1936) general
theory of employment, interest and money which stipulated
that consumption expenditure is the most important short run
determinant of economic performance; (b) Nnadi (2011) for
instance, measures consumption expenditure with retail price
index while our paper uses PCE. Thus, retail price index could
be most suited for inationary measure because; retail price index
measures changes in the cost of basket of retail goods and services.
Furthermore, this paper is divided into ve sections. Section two
is a review of literature; Section three outlines the methodology,
and Section four results presentations and analysis of ndings
while section ve is the conclusion and policy recommendations.
2. REVIEW OF LITERATURE
2.1. Theoretical Literature
There has been a serious debate on the determinants of
consumption. Theoretically, many arguments have been raised
on what could be the determinants of consumption. Some
view consumption as a function of income while other argued
that consumption aren’t depend on income alone, observing
other behavioural factors as a signicant factor. For instance,
John Maynard Keynes general theory in 1936 recognizes
the relationship between income and consumption as a key
macroeconomic relationship. He asserted that real consumption is
a function of real disposable income (i.e. income after taxes), and
that as income rises, consumption also rise but not necessarily
Figure 3: Graph of consumption, ınation and real interest rate
Sources: Author’s Concept

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018 35
proportional. However, as a result of Keynes’ postulates, many
eyebrows were raised. Some scholars did not see the relevance
of his theory when applied across the population, claiming that
rich people are expected to consume less amount of income than
their counterpart poor. Conversely, Duesenberry (1949) study
on income, saving and the theory of the consumer behaviour
titled “relative income hypothesis” stated that individual view of
consumption and savings (SAV) is guided more by their income
in relation to others than their standard of living. He maintained
that the percentage of income consumed by an individual
depends on the income distribution. In addition, he suggested that
present consumption is not prejudiced just by present levels of
absolute and relative income, but also by levels of consumption
attained in preceding periods; hence it is difcult to reduce level
of consumption once attained. Also that the aggregate ratio of
consumption to income is assumed to depend on the level of
present income relative to past peak income.
In the same vein, in 1957, Milton came up with his ideology
embodied in permanent income hypothesis which assume
rational behaviour by agents. The hypothesis stated that a
change in permanent income, rather than a change in temporary
income, affects the choices that determine consumer’s
consumption patterns. He concluded that transitory, temporary
changes in income have little effect on consumer spending
behavior, whereas permanent changes can have large effects on
consumer spending behavior. He sees consumption as a function
of individual’s real wealth, but not current real disposable
income because, he assumed that an individual saves only
when they expect that their long-term average income, their
permanent income, will be less than their current income. But
Modigliani (1963) has a seemingly different perception in his
life-cycle theory. He hypothesized that individuals strategize
their consumption and SAV behaviour over the long period and
aim to level their consumption in the best possible manner over
their entire lifetimes, suggesting that they usually don’t save
up a lot in one period to spend furiously in the next period,
but keep their consumption levels approximately the same in
every period.
Apart from the discussed consumption theories, monetarists also
air their views on other issues that may likely affect consumption
directly or indirectly. Milton (1976) sees money supply as one
of the major causes of ination and emphasizes the role of
governments in controlling the amount of money in circulation.
He is of the view that variation in the money supply has major
inuences on national output in the short run and the price level
over longer periods, and suggested that monetary authorities to
focus solely on maintaining price stability. In addition, Irving
Fisher’s theory of capital investment and interest exposited in his
work titled “the nature of capital and income in 1906,” elaborated
more in a work on “the rate of INTR in (1907),” postulated that
subjective economic value is not only a function of the amount of
goods and services owned or exchanged, but also of the moment
in time when they are purchased. He added a good available now
has a different value than the same good available at a later date;
value has a time as well as a quantity dimension. The relative price
of goods available at a future date, in terms of goods sacriced
now, is measured by the INTR. Irving Fisher’s theory of INTRs
relates the nominal INTR to the rate of ination and the “real”
INTR. The real INTR is the INTR after adjustment for ination.
It is the INTR that lenders have to have to be willing to loan out
their funds. Therefore, increase in the real INTR discourages
borrowing which invariably affect investment and consumption
expenditure.
2.2. Related Empirical Literature
A number of studies have been carried out on the relationship
between consumption and INTR, ination and the related. Some
of these studies include the work of Fazel (2005) which suggested
that disposal income is a good predictor for consumption
expenditure and that index for consumer sentiment does not
have explanatory power to predict future level of consumption;
and Saad (2011) that revealed the signicant effect of private
consumption by changes in real disposal income, real INTR,
anticipated ination and wealth.
Furthermore, Nnadi (2011) assessed the effectiveness of the
government’s scal measures to stabilize the economy through
spending. He developed a consumer spending model (CSM)
and assessed its impact on intrinsic scal policies such as bank
rate, ination, percentage earning increase and mortgage rate.
Using the retail price index and data obtained from the ofce of
National Statistics. He found bank rate and annual ination as most
signicant factors affecting consumer spending and suggested
that scal measures targeted at reducing bank ending rates and
controlling ination should be the government’s policy priority.
Also, Onodje (2009), examine the effects of scal policy shocks
on private consumption to the Nigerian. He examined whether
government expenditure shocks and tax revenues shocks have
Keynesian Effects. Using data spanning the period 1980–2004.
Vector error correction model was used in the estimation. The
results of his ndings indicated that both government consumption
and tax revenue shock have Keynesian effect on private
consumption Nigeria.
Emerole et al. (2007) study on the determinants of consumption
expenditure and its share to total income in small farm household in
Ikwano, Abia State Nigeria, using a multi-stage random sampling
technique on a panel of small-scale farmers who supplied cross-
sectional and longitudinal information for their research, found
that food and drinks accounted for 48.7% of the total consumption
spending with consumption spending 40.0–60.0% of the household
income. They found perhousehold income (in net farm income plus
off-farm income) to have high positive inuence on consumption.
Per-household member wealth (proxied by per-household-member
begining fortnight saving) is also found to be negatively related to
consumption. They therefore recommended that programmes that
enhance per-household-member income and better living standards
of members should be implemented. On the other hand, Adedeji
and Adegboye (2013) conducted a study on the determinants of
PCE in Nigeria, using a time series data that covers the periods
1975–1998. From the results obtained, it was indicated that only
disposable income portrayed a signicant inuence on PCE within
the period of study other variables like money supply, INTR and
import were insignicant.

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018
36
CONS=f(SAV, INTR, INDTAX, INF, PCI) (1)
The econometric model of the function is expressed as:
PCEt=β0+β1INTRt+β2CPIt+β3PCIt+β4INDTAXt+β5S AV t+ε (2)
Where, Con is consumption expenditure captured with PCE.
PCE measures the value of goods and services purchased by
individual consumers, families and institutions. It excludes the
purchase of residential structures by individuals, families and
institutions such as buildings or equipments. Other explanatory
variables in the model include; INTR, ination captured with
CPI; per capita income (PCI), indirect tax (INDTAX) and SAV,
while Ɛt represents the error term. CPI measures the annual
percentage changes in the price level of basket goods and
services purchased, as well as the real values of wages, salaries
and pensions of the household. INTR is the rate at which interest
is paid by a borrower for the use of money borrowed from a
lender. It is the rate that may cause household to defer their
consumption expenditure. When there is high INTR, consumers
reduce their consumption. Hence, high INTR is a disincentive to
consumer. PCI is the income per head. An increase in PCI of an
individual invariably increases the consumption expenditure of
the individual. The a priori expectation for the above estimation
becomes;
β0 < 0, β1 < 0, β2 < 0, β3 > 0, β4 < 0, β5 < 0
Based on a priori therefore, the signs of β0, β1, β2, β4 and β5 are
expected to be negative while β3 is expected to be positive.
3.1. Granger Causality Test
To investigate if PCE granger causes interest and ination rates,
granger causality Wald test is applied.
PCEPCE CPI
tt
t
n
t
n
tt
=+
++
−
==
−
∑∑
βλ
φψ
01
11
1 (3)
CPIPCE CPI
tt
t
n
t
n
tt
=+ +∂ +
−
==
−
∑∑
χϕ υ
01
11
1 (4)
PCEPCE INTR
tt
t
n
t
n
tt
=+
++
−
==
−
∑∑
ρβ
γξ
01
11
1 (5)
INTR PCEINTR
tt
t
n
t
n
tt
=+
++
−
==
−
∑∑
µζ
θε
01
11
1 (6)
Where ψt, υt, ξt and Ɛt are mutually uncorrelated error terms.
λ, φ, β,ϛ, ɸ, ∂, γ and θ are the coefficients of PCE, CPI and
INTR in equations 3, 4, 5 and 6 while β0, ᵡ0, ρ0 and μ0 are
the constants.
4. RESULTS PRESENTATIONS AND ANALYSIS
OF FINDINGS
Before assessing the relationship between INTR, ination rate and
consumption expenditure, pre-estimation test such as stationarity,
multicollinearity and autocorrelation were conducted. From
Okoro (1998) in his work carried out extensive study on how INTR
wealth, income and ination has affected consumption behaviour in
Nigeria which spans the period 1975–1995. Using secondary data
obtained from Central Bank of Nigeria, he found that Nigeria’s MPC
was high at about 0.89. He also found that rate of ination and INTRs
both for the banks and the capital market and accumulated wealth
affected consumption pattern in Nigeria. In like manner, Attama
(1998) performed a test on the determinants of consumption in
Nigeria. The study covers the period’s 1976–1995. Using ordinary
least square technique, he found that 1% increase in money supply
will increase consumption by 23% while 1% increase in INTR will
reduce consumption by 19%. Also, it was noticed that 1% increase
in import increases consumption by 7% while 1% increase in
disposable income increases consumption by 54%. Audu (2012) in
an investigative study on the dynamic analysis of scal policies on
consumer’s pending in Nigeria: a time series approach, using the
ordinary least squares technique and data collected for the period
1970–2010, the study assessed the effectiveness of government’s
scal measures to stabilize the economy through spending. From
the CSM used to assessed the effectiveness of the key variables like
ination rate, INTR, mortgage rate and annual earnings increase
on retail price index, the study depict that ination rate and INTR
were the key variables that affects consumer spending. As such, he
recommends that scal measures targeted at reducing INTR (lending
rate) as well as controlling ination should be the policy priority of
the Nigerian government.
Fasoranti (2012) conducted a study in Akoko North West Local
Government Area of Ondo State. The study examined the
determinants of consumption among rural dwellers in the local
government area. The inuence of some selected variables as
identied by literatures related to consumption on the level of
consumption in the study area was considered. Data for the
study was obtained through primary and secondary sources.
The data obtained was analysed with the aid of simple multiple
regression analysis. Results shows that current income, expected
pension fund, shares and durable assets are positively related to
consumption while expected future income and deposits in banks
are negatively related. Among other things, the study revealed
that expected future income, deposits at banks and shares are
significant determinants of consumption in the study area.
However, consumption can be reduced in the study area if INTRs
on deposits are increased.
3. METHODOLOGY AND DATA SOURCE
The study used annual data which covers the periods of 1981–
2011. The data for the study is generated from Nigeria Bureau of
Statistics and Central Bank of Nigeria Statistical Bulletin. The
relationship between INTR, ination rate and consumer’s spending
was examined looking at the econometric evidence. To facilitate
comparison to widely recognise econometric specification,
we adopt a simple standard empirical model of consumption
expenditures whose theoretical framework is based on Keynes
(1936). Therefore, households are presumed to base their spending
on their wealth, income and INTRs which is also deeply affected by
ination. Hence, basic representation of the consumer expenditure
in a functional form is:

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018 37
Table 1, it is evident that all the variables were stationary at 5%
level of signicance.
From the test above, PCI and SAV are integrated of the same
order with the dependent variable – PCE. Hence, we suspected the
existence of cointegration on the variables. Therefore, to ascertain
if actually there exists a cointegration problem, we conducted a
unit root test on the generated residuals (Table 2).
From the reported cointegration test above, the augmented Dickey
Fuller (ADF) is less than the critical value at 5% signicance
level. Though, the ADF is positive. Hence, the null hypothesis of
no cointegration is not rejected. In addition, we also conducted
the Durbin-Watson test to ascertain if the variables are auto
correlated. The DW (6, 31) = 2.759982 test result fall within the
indecision zone. To make sure that there is no omitted variables
in the model, specication test was conducted. The results F (3,
22) = 3.54 with p > F = 0.0312 indicated that the model is well
specied. Even the normality result, using the Jarque Bera test
(JBcal 3.46187 < 5.99) also suggests that the residual is normally
distributed.
As shown in Table 3, all the variables are statistically signicant
except INTR. The explanatory variables account for approximately
93.38 percent variation in PCE while the P > F = 0.0000 indicates
that the explanatory variables are jointly signicant and are capable
of explaining changes in PCE in Nigeria. However, it is observed
that all the explanatory variables have a positive relationship with
PCE except SAV. The results equally shows that a percentage
increase in INTR, CPI, PCI and INDTAX account for 13.377%,
21.655%, 0.7131% and 0.01368% increase in PCE respectively
while a percentage fall in SAV account for 0.0002768% fall
in PCE. The ndings on the relationship between INTR, CPI,
INDTAX and PCE are contrary to the a priori expectation. While
the ndings on PCI and SAV is in accordance with the postulates of
Maynard Keynes’ theory on income and consumption expenditure,
the results on INTR and ınation (CPI) is contrary to Irving
Fisher’s theory of interest and ination rates. Considering the
core variables of the study – interest and ination rates (CPI),
the finding on the relationship between inflation (CPI) and
consumer spending (PCE) supported the work of Nnadi (2011) and
Audu (2012) while that of INTR is contrary with their ndings.
Beside, interest and ination rates are important determinants
of consumer’s spending in Nigeria. To promote consumption
expenditure (proxy; PCE) in Nigeria, there is the need for policies
that will encourage the reduction of high INTR, ination rate
(proxy; CPI) and INDTAX, and stimulate increase in PCI and
reduction in SAV. This is because; increase INTR could make SAV
more attractive to consumers and investors, than spending because
of the expected higher return that may accrue to their money if
saved. Conversely, this can make them put more of their money
into saving thus, leaving them with little or no money to spend.
And as the ination rate increases SAV that has been accumulated
over a long periods by the investor and households get devaluated,
hence resulting in lower consumption. This in turn will not only
affect consumers but the aggregate output in the economy.
To investigate if PCE granger causes INTR and CPI, we resort
to granger causality Wald test presented on Table 4. The results
suggest that PCE does not granger-cause INTR and CPI. This
implies that PCE cannot be use to predict future INTR and changes
in the price level of basket of goods and services purchased by
households.
5. CONCLUSION AND POLICY
RECOMMENDATION
The study investigates the effects of interest and ination rates
on consumers’ spending in Nigeria. The effects ination which
was measured with CPI on consumer spending is found to be
statistically signicant, while INTR is insignicant. The outcome
of the granger causality using Wald tests shows that future interest
and ination rates cannot be predicted using PCE.
Furthermore, the ndings suggest that explanatory variables
account for approximately 93.38% variation in consumer spending
as measured by PCE. This shows that INTR, ination rate (proxied
with CPI), PCI, INDTAX and SAV are important determinants of
PCE in Nigeria which supported the work of Emerole et al. (2007),
Adedeji and Adegboye (2013), Audu (2012); and postulates of the
work of Fisher (1906; 1907) and Keynes (1936). Therefore, based
on these ndings, we recommend expansionary scal and monetary
policies to inuence the level of aggregate demand in the economy
in order to achieve price stability, full employment and economic
growth in the economy by increasing government spending and
decreasing tax rates. Also lower INTRs are recommended for easy
access to credit to induce business activities.
Table 1: ADF test statisticw
Variable ADF value Critical values Trend Order of ıntegration
1% 5% 10%
PCE −12.009 −4.343 −3.584 −3.230 Yes I~(1)
INTR −3.160 −3.716 −2.986 −2.624 No I~(0)
CPI −5.451 −4.352 −3.588 −3.233 Yes I~(2)
PCI −3.680 −4.343 −3.584 −3.230 Yes I~(1)
S AV −4.168 −4.380 −3.600 −3.240 Yes I~(1)
INDTAX −10.448 −4.371 −3.596 −3.238 Yes I~(0)
ADF: Augmented Dickey Fuller, PCE: Private consumption expenditure, INTR: Interest rate, CPI: Consumers’ price index, PCI: Per capita income, SAV: Savings, INDTAX: Indirect tax
Table 2: ADF residual test result
ADF value Critical values
1% 5% 10%
Z (t) 2.148 −3.716 −2.986 −2.624
McKinnon approximate P value for Z (t) = 0.9988. ADF: Augmented Dickey Fuller

Manasseh, et al.: The Effects of Interest and Ination Rates on Consumption Expenditure: Application of Consumer Spending Model
International Journal of Economics and Financial Issues | Vol 8 • Issue 4 • 2018
38
Table 3: Estimated results
PCE Coefcient Robust standard error t-statistic Probability value
INTR 1337.668 1368.371 0.98 0.338
CPI 2165.528 422.5237 5.13 0.000
PCI 71.30967 30.41788 2.34 0.027
S AV −0.0276848 0.0122104 −2.27 0.032
INDTAX 1.368405 0.2581901 5.30 0.000
CONS −87003.55 73622.73 −1.18 0.248
R2=0.9338; P>F = 0.0000. PCE: Private consumption expenditure, INTR: Interest rate, CPI: Consumers’ price index, PCI: Per capita income, SAV: Savings, INDTAX: Indirect tax
Table 4: Granger causality wald tests
Equation→Excluded χ2df P>χ2
PCE→INTR 4.7344 2 0.094
PCE→CPI 5.3375 2 0.069
PCE→ALL 14.801 40.005
INTR→PCE 3.3074 20.191
INTR→CPI 2.2155 2 0.330
INTR→ALL 4.1260 40.389
CPI→PCE 1.5685 2 0.456
CPI→INTR 1.6706 20.434
CPI→ALL 3.6087 40.462
PCE: Private consumption expenditure, INTR: Interest rate, CPI: Consumers’ price
index, PCI: Per capita income
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