An Econometric Investigation of the Impact of Inflation on Economic Growth in Nigeria (1986-2016)

International Journal of Research and Innovation in Social Science (IJRISS) | Volume II, Issue XII, December 2018 | ISSN 2454–6186

An Econometric Investigation of the Impact of Inflation on Economic Growth in Nigeria (1986-2016)

James T. Ihum1, Nafiu Bashir Abdussalam2 and Fabian Stephen3

1Former Postgraduate Student, Department of Economics, LUBS, University of Leeds, UK
2Department of Economics, Faculty of Social and Management Sciences, Bayero University Kano, Nigeria
3Center for Energy, Petroleum and Mineral Law and Policy, School of Social Sciences, University of Dundee, UK

Abstract: – The study was conducted to evaluate the impact of inflation on economic growth in the context of an emerging market using empirical evidence from Nigeria. Using time series data spanning thirty years (1986-2016) which was obtained from the Central Bank of Nigeria (CBN) official website, the nature of the relationship existing between the focus variables- economic growth (proxied by real Gross Domestic Product, GDP) and inflation rate was explored. The Augmented Dickey Fuller (ADF) was used to test for the stationarity of the variables while the granger causality test was employed to ascertain the direction of influence between inflation and economic growth in Nigeria. The results showed no evidence of causal relationship between inflation and economic growth in Nigeria. Again, there is no leading variable in the relation between inflation and economic growth in Nigeria. The study therefore concludes that inflation does not stimulate economic growth and vice versa. It is thus recommended that since it may be difficult to control inflation, effectively manage real exchange rate and ensure stable growth at the same time, the CBN should set nominal interest rate such that the real interest rate will follow the pattern of growth in the economy. CBN should only worry if the rate of inflation is significant given the uncertainty of existence of causality between inflation rate and real GDP growth in this study. The CBN should also get involved and collaborate in foreign exchange in order to maintain a stable real exchange rate.

Keywords: Inflation, economic growth, money supply, exchange rate, granger causality.

I. INTRODUCTION

Inflation has remained a chronic problem for Nigeria economy for some time. Inflation is not a new word in the world economy and not out rightly bad, but the case of Nigeria is severe and it will destabilize the entire economic framework if it is not properly checked. This problem has brought about reduction of purchasing power, discouragement of real investment, balance of payment disequilibrium and unemployment.

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