Effects of Inflation Rate on Economic Growth in Nigeria (1986-2014)

Abstract

This paper investigates the effects of inflation on economic growth in Nigeria between 1986 and 2014; secondary data culled from CBN Statistical Bulletin (2014) were used for the study. The Augmented Dickey-Fuller technique was adopted to test the unit root property of the series while Granger causality was used to test the causation between GDP and inflation.

The objectives of the study are to: describe the trend of inflation in Nigeria over the years under review: to determine the effect of inflation on economic growth and to proffer policy recommendations based on the findings of the study.

The result of table 1 shows that R2 is 0.147. This implies that about 14 percent in total variation in dependent (economic growth) is being explained by explanatory variable (inflation rate). The coefficient of inflation rate is negative; this implies that a percentage increase in inflation rate will lead to 27 percent reduction in economic growth. However, the inflation rate is significant at 5 percent. The constant is statistically significant at 1% implies that GDP does not only depend on inflation but other variables may affect GDP. The F-statistics of 4.68, which is a measure of the joint significance of the explanatory variables, is found to be statistically significant at 5% as indicated by the corresponding probability value 0.0394. The Adjusted R2 0.116 (11.6%) implies that 11.6 percent total variation in GDP is explained by the regression equation. Coincidentally, the goodness of fit of the regression remained too low after adjusting for the degree of freedom. The results of unit root suggest that all the variables in the model were stationary at 1%, 5% and 10% critical values with first difference. The results of Causality suggest that GDP causes inflation and not inflation causing Growth. The results also revealed that inflation had a negative impact on economic growth.

The study also showed that inflation possessed a positive impact on economic growth through encouraging productivity and output level and on evolution of total factor productivity. A good performance of an economy in terms of per capita growth may therefore be attributed to the rate of inflation in the country. A major policy implication of this result is that concerted effort should be made by policy makers to increase the level of output in Nigeria by improving productivity/supply in order to reduce the prices of goods and services (inflation) so as to boost the growth of the economy.

Keywords: Inflation, economic growth and development (GDP).