The Casualty Evidence for Interest Rates and SME’s Outputs Relation from A Developing Economy

Abstract

Purpose Small and medium-scale enterprises (SMEs) play a significant role in many economies. Governments often employ various policies, especially monetary policy, to support their operations. This study aims to illustrate the interdependence between SMEs' output growth and monetary policy instruments, specifically the interest rate. Methodology The study utilized data spanning 1980 to 2021 to investigate evidence of symmetric Granger causality and asymmetric causality between interest rates and SMEs' outputs in Nigeria. Findings The symmetric approach reveals unidirectional causality evidence from the interest rate to SME output, without potential feedback effects. The asymmetric causality demonstrates that both positive and negative shocks in interest rates drive shocks in SMEs' outputs, but not vice versa. Conclusion The study concludes, among other findings, that to enhance the impact of policies on SMEs' outputs, authorities should establish state agencies as coordinating units to monitor policy implementation. Additionally, efforts should be directed towards putting adequate infrastructural facilities in place for the proper operation of the SMEs. Practical Implications The study provides insights indicating that positive (negative) shocks in the interest rate cause negative (positive) shocks in SMEs output, thus aligning with the associated economic theory.

Keywords

• Monetary policy
• Granger causality
• Symmetrical causality
• Asymmetrical causality
• SMEs