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The impact of inflation on economic growth in nigeria

It is a monster that threatens all economics because of its undesirable effects Imobighe, 2012; Adenuga, et al. Although, there is no a clear cut relationship between economic growth and inflation Majumder, 2016some evidence suggests that moderate inflation helps in economic growth, the overall weight of evidence so far clearly indicated that inflation is inimical to growth Bawa and Abdullahi, 2012; Omotosho and Doguwa, 2013; Amandeep, 2014.

The problem of inflation surely is not a new phenomenon.

Journal of Research in National Development

It has been a major problem in the country over the years. Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy Lipsey and Chrystal, 1995. According to Umaru and Zubairu, 2012 the concept of inflation can be define as a persistence rise in the general price level of broad spectrum of goods and services in a country over a long period of time.

According to Badreldin 2014inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy. Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation.

After an appreciable economic performance in the early 1970s, the Nigeria economy witnessed some anxious moment in the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years.

This was accompanied by rapid growth in domestic money supply, exacerbated by the monetization of the earnings from oil Kumapayi, et al. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level.

The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. In this case, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximised, cost should be minimised. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly.

As a heavily import-dependent economy, the high import cost pushed up the inflation rate to double digit. Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level Rao and Yesigat, 2015.

  1. While the structuralists argue that inflation is crucial for economic growth, the monetarists posit that inflation is harmful to economic growth Doguwa, 2013. Inflation is a household word in many market oriented economics.
  2. According to Umaru and Zubairu, 2012 the concept of inflation can be define as a persistence rise in the general price level of broad spectrum of goods and services in a country over a long period of time. The magnitude of this inflationary trends may be largely explained by the rapid growth of money supply motivated by the expansionary fiscal policies of the public sector, in addition to exchange rate fluctuation and poor diversification of the economy.
  3. A good performance of an economy in terms of per capita growth may therefore be attributed to the rate of inflation in the country.
  4. Besides the regression analysis, tables and charts were also used to examine the trend of inflation rate over the years.

This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability Ibrahim and Agbaje, 2013; Salam et al, 2006. The effects of inflation on economic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth.

As it is generally believed that the attainment of every other macroeconomics goals depend on the maintenance of a stable and low inflation environment Ajide and Lawanson, 2012; Zahra, 2014. Over the years the question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate Erbaykal and Okuyan, 2008. While the structuralists argue that inflation is crucial for economic growth, the monetarists posit that inflation is harmful to economic growth Doguwa, 2013.

  • International Research Journal of Finance and Economics;
  • This is necessary because identifying the possible relationship between inflation and economic growth may expedite the process of realising the feasible policy options to be adopted towards achieving sound macroeconomic growth in Nigeria;
  • The objectives of the study are to;
  • Three multiple regression models shall be used in the estimation;
  • 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;
  • Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years.

Although the debate about the precise relationship between these two variables is still open, the continuing research on this issue has uncovered some important results. In particular, it is generally accepted that inflation has a negative effect on medium and long-term growth Bruno and Easterly, 1998.

Inflation impedes efficient resource allocation by obscuring the signalling role of relative price changes, the most important guide to efficient economic decision-making Fischer, 1993. Contrarily, Omotosho and Doguwa 2013 found that the periods of high inflation volatility in Nigeria are associated with periods of specific government policy changes, shocks to food prices and lack of coordination between monetary and fiscal policies.

However, most previous studies have focused on the effect of inflation on growth in developed countries while little attention has been paid to developing countries.

It is therefore imperative to conduct a research into the effect of inflation on economic growth in developing countries with special focus on Nigeria, which is the main thrust of this study.

Asian Research Journal of Arts & Social Sciences

The specific objectives of this study are to: What is the trend of inflation in Nigeria? How does Inflation impact on economic growth in Nigeria? What is the effect of inflation on the level of capital formation in Nigeria? How does inflation affect the consumption expenditure of Nigerian households? Inflation does not hinders significantly the economic growth of Nigeria.

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Inflation hinders significantly the economic growth of Nigeria. Inflation does not hinders significantly capital formation in Nigeria.

Inflation hinders significantly capital formation in Nigeria. Inflation does not hinders significantly consumption expenditure of people in Nigeria. Inflation hinders significantly consumption expenditure of people in Nigeria.

Three multiple regression models shall be used in the estimation.

The first model would seek to investigate the effect of inflation on the economic growth of Nigeria, the second model seeks to examine the effect of inflation on capital formation investment while the third model probe the impact of inflation on private consumption expenditure. The estimation period would be restricted to the period between first quarter of 2011 and third quarter of 2015 due to non-availability of all the needed data. Besides the regression analysis, tables and charts were also used to examine the trend of inflation rate over the years.

Secondary data shall be the basis of data to be used in this study. The variables for which data were sourced include: In order to identify the macroeconomic effect of inflation persistence in Nigeria, this study would investigate the impact of inflation on macroeconomic variables such as productivity, investment, and consumption. This study is significant in the followings ways: Despite various policies that had been formulated and implemented, no meaningful progress has been made in the combat of inflation.

Therefore, this study examines not only the effect of inflation on the economic growth, it also investigate its effect on other macroeconomic variables. The effect of inflation on economic growth shall be investigated empirically with the data spanning the impact of inflation on economic growth in nigeria 2011Q1 to 2015Q3. This restriction is unavoidable because of the rebasing of economic data from 1990 to 2010 and due to non-availability of all the needed data.

The research shall commence by providing a background of the subject matter justifying the need for the study in chapter one. Chapter two shall present related literatures concerning inflation, its causes and effects.

The research methodology shall be outlined in chapter three, while the data presentation and analyses shall be made in chapter four as well as highlights of the implications of the findings. Concluding comments in chapter five shall reflect on the findings of the study, and recommendations based on the the findings. Asian Economic and Financial Review. Journal of Monetary Economics. International Research Journal of Finance and Economics. International Review of Business and Social Sciences.

Asian Journal of Empirical Research. American Journal of Marketing Research. International Journal of Business and Social Science. Interdisciplinary Journal of Contemporary Research in Business.