Inflation and Economic Growth in Nigeria
CHAPTER ONE
Objective of the Study
The aim of this study is to measure the impact of inflation on the Nigerian economy and its effects on Real Gross Domestic Product of Nigeria based on the annual time series data from 1990-2020.
The specific objective is to;
To investigate the inflation and economic growth relationship.
CHAPTER TWO
LITERATURE AND THEORETICAL REVIEW
Conceptual Literature
The definition of fundamental concepts as well as the types, causes, impacts, and treatments of inflation both inside and outside the Nigerian economy were discussed.
a) The concept of Economic Growth
According to Balami (2006), economic growth, which is usually measured in terms of GDP, is frequently interpreted as an increase in an economy’s capacity to provide the commodities and services necessary to raise the standard of living for its population. Raising the volume of products and services produced in the economy is viewed as a key component of growth, which is a constant process. Because it must result in an increase in human wellbeing, growth that is significantly faster than population expansion is relevant. Growth is therefore viewed as a continuous process of raising the economy’s productive capacity and, consequently, of raising national income. It is distinguished by higher rates of increase in per capita output and total factor productivity, particularly labor productivity. Though economic growth is linked to a rise in capital per capita, capital is not the essential prerequisite for growth, claim Fajingbeji and Odusola (1999). Therefore, money will be wasted if it is made available without a plan on how to spend it at the same time. Additionally, as Hemming (1991) noted, the mix of expenditures has an impact on growth since some types of spending have a greater impact than others. The provision of socioeconomic infrastructure, operations and maintenance, as well as basic administrative and legal frameworks, are crucial among these sorts of spending. In a similar vein, Ogiogio (1995) argued that sufficient funding of the public sector recurrent budget results in an efficient and effective civil service, and as a result, the efficiency with which development strategies and programs are carried out. According to Hemming’s (1991) analysis, even expenditures that appear to be less productive—like security—provide the social and political stability needed for growth, therefore cutting back on them might have the opposite effect. Therefore, the key conclusions that can be drawn from these research are that public expenditures contribute to growth and that composition is more significant than level.
This thesis is concerned with the GDP growth rate, or the rate at which the economy is expanding. By using the well-known compound interest formula as a framework, the rate of GDP growth can be calculated. The compound interest formula comes to mind.
CHAPTER THREE
DATA AND METHODOLOGY
Variables and source of Data
The study employed the use of time series data generated annually from Nigeria from 1990 to 2020. Data was gotten from the World Bank databank (databank.worldbank.org). To analyze these data series, a vector autoregressive (VAR) model is designed. The VAR model is a very common model used to investigate the linkage between macroeconomic variables as we aim to do for this study. Further we employ other advanced time series methods such as the Granger Causality, Impulse Response, and then the Error Correction Model. Prior to formulating the systems of equations for the VAR, we perform various tests for stationarity of the series, and then check for the long run cointegration of the variables.
For the model, all variables in the system are assumed to be endogenous within the system of equations, but for the individual equations we regress each variable on its lag values, and other variables on their lagged values. The reduced form of VAR is expressed below as equation 1:
For the model, all variables in the system are assumed to be endogenous within the system of equations, but for the individual equations we regress each variable on its lag values, and other variables on their lagged values.
CHAPTER FOUR
INTERPRETATION OF RESULTS AND DISCUSSION
To avoid estimating a spurious regression model, we check for the stationarity of the series before doing any analysis. To check for stationarity, we apply the variance, unit root test that include the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) methodology. Table 1 presents both the results of the unit root test at the level form of the series and after first differencing in the case where stationarity is not found at the level form. From the results, we found that all the series are not stationary at their level form, but stationary at 1st difference, that is the series are all ~I(1). In addition, we checked for the stationarity with intercept and trend, intercept only, and neither intercept nor trend. For the CPI, after first differencing in the series, the ADF supports a hypothesis that the series is stationary however, the PP shows that the CPI is not stationary when we consider both intercept and trend. Hence, the need to further diagnose the stationarity of this series, which is now tested with the KPSS method.
CHAPTER FIVE
SUMMARY, RECOMMENDATIONS AND CONCLUSION
Summary of Result
This research aims at empirically examining the impact of inflation on Nigeria’s economic growth i.e real gross domestic product in Nigeria. Reviews conducted from different relevant Literatures suggest that the fluctuations in inflation rate in Nigeria is determined by structural and infrastructural constraint such as the elimination of fuel subsidy, destructive floods that occurred in the economy during the third and fourth quarter of the year and seasonal effects. These factors have one way or the other contributed to a rise in prices in the country. Time series data were collected annually for important variables for the period of 1990-2020. The study made use of the Augmented Dickey fuller (ADF), Phillips Peron (PP), Kwiatkowski Phillips Schmidt and Shin’s test (KPSS) unit root tests and the Johansen co-integration test were used.
The results generated empirically for the ADF showed that at the level form, all the variables are non-stationary but after first differencing the variables showed that they were stationary and integrated of order one. The Johansen and Julius cointegrated test was employed to check if there exists a long run equilibrium between the variables, results from this test showed that the variables were cointegrated after 1st differencing, meaning a long run equilibrium exists between the variables.
Policy Recommendation
As we try to exploit the long run impact of inflation on economic growth, our findings from this study shows that inflation has a long run negative and permanent effects on real gdp. The causality test further shows that there is strong causality from real gdp to unemployment. While the policy makers are watchful of the movements in general price level, policies that tend to reduce inflation can be costly to the society as it is likely to slow economic activities and cause a rise in unemployment rate in the short run. The rise in unemployment rate that results from inflation reducing policies could have a temporary multiplier effect through the social hardship that would be inflicted upon those negatively affected by such policies.
As in the case of Nigeria, this analysis found that the effects of inflation transmits gradually as wages and prices adjust slowly to changing economic environment. Hence, we recommend that before making any inflation targeting policy, the social planner should build a dynamic model that can weigh the short run costs against the long run benefits of such plans. The short run cost of managing inflation within the economy to a low rate is the trade-off with unemployment that is expected to reduce in the long run when the economy starts to improve. In other words, in formulating the inflation targeting policies, the central authority should take a long-term structural view of the economy and the benefits of its policies. The success of achieving a minimal short-term cost of reducing inflation in the country would depend on the commitment of the government, which determines how the public view and behave towards such policy.
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