Impact of inflation on economic growth in Nigeria in the context of an emerging market


Research Paper (undergraduate), 2016

18 Pages, Grade: A


Excerpt

Table of contents:

ABSTRACT

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Purpose of the Study
1.4 Research Questions
1.5 Statement of Hypothesis
1.6 Significance of the Study
1.7 Limitation of the Study
1.8 Scope of the Study
1.9 Organization Of The Study

2.0 REVIEW OF RELATED LITERATURE
2.1 CONCEPTUAL FRAMEWORK
2.2 EMPIRICAL LITERATURE

3.0 RESEARCH METHODOLOGY
3.1 Research Design
3.2 Method of Data Analysis
3.3 Model Specification
3.4 Estimation and Validation Of The Models Unit root test

4.0 DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Presentation of Data
4.2 Analysis of Data

5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendation

REFERENCES

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 forty one years (1970-2011) which was obtained from the Central Bank of Nigeria (CBN) statistical bulletin volume 22, and Central Bank of Nigeria 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) and Philip-Perron (PP) tests were used to test for the stationary 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 show that there exists a statistically significant positive relationship between inflation and economic growth in Nigeria. However, there is no leading variable in the relation between inflation and economic growth in Nigeria. And hence we conclude that the effect is contemporaneous. And since there exists a positive relationship between inflation and economic growth in Nigeria, the “bad era of double digit inflation rate” could be effectively utilized by the Nigeria government to erode the country’s debt burden. In other words, instead of spending billions of naira in negotiation for “debt forgiveness”, the government should “inflate away her debt”.

1.1 Background of the Study

A macro-economic problem facing Nigeria and the most disturbing is the problem of inflation. As a result of its growing rate, Nigerian government is concerned about its impact on her economic growth. Though much has been written about inflation, all the authors agree that it has an impact on Nigerian economic growth.

Samuelson (1973) defines inflation as a "general rising prices for breeds, cars, haircuts, rising wages, rent e.t.c. Onwukwe (2003), on his side defines inflation as a significant and sustained rise in the general price level or a declining value of the monetary units.

During inflationary period, fixed amount of money buys less quantity of goods and services. The real value of money is drastically reduced i.e. the purchasing power of money of consumers are reduced.

Having a little view on the impact of inflation in Nigeria economy and realizing that the problems caused by the impacts of inflationary growth is becoming unbearable to the citizens and the entire economy, it becomes necessary to critically analyse the impact of inflationary on Nigerian economic growth.

1.2 Statement of the Problem

Inflation growth has been the macro-economic problem in Nigeria that seems to be intractable over the years; Nigeria government has adopted various measures (both monetary and fiscal policies) to curb or reduce inflation growth to an acceptable level but all these policies seem to have no effects. This gave rise to the following research questions.

1.3 Purpose of the Study

The study is aimed at the following objectives:

1) To determine the impact of inflation on Nigerian economic growth
2) To identify how money supply affects Nigerian economy
3) To recommend to the monetary authorities and the government on how inflation should be reduced to an acceptable level

1.4 Research Questions

The follow research questions will guide this study;

- What is the trend of inflation in Nigeria?
- Why have all the policies used unable, to reduce inflation rate to an acceptable level?
- What is the impact of inflation of Nigerian economic growth?

1.5 Statement of Hypothesis

To carry out the study effectively, the following hypotheses have been formulated as a guide:

Ho: Inflation has no significant impact in Nigerian economic growth

H1: Inflation has significant impact on Nigerian economic growth

1.6 Significance of the Study

The importance of this study is so numerous to mention. It will be useful to policy makers especially formulating policy that will reduce inflation growth rate. It will be useful to monetary houses like the Central Bank and Commercial Banks. It will also be useful to students of economics and other related fields. It will be useful to the general public.

1.7 Limitation of the Study

There are some limitations to this study and they include;

i. Time Constraint
ii. Inadequate finance
iii. Lack of access to data and other related materials

1.8 Scope of the Study

To get real picture of the impacts of inflation on an economy, the study will cover the whole Nigerian economy between 1970 to 2011.

1.9 Organization Of The Study

This study will be divided into five chapters. The research shall commence by providing a background to 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 analyse shall be presented 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 findings.

2.0 REVIEW OF RELATED LITERATURE

2.1 CONCEPTUAL FRAMEWORK

2.1.1 Concept of Inflation

Inflation has various definitions depending on how people see it. It is regarded as a rise in general level of prices. The tendency of rising prices and a fall in the value of money is known as inflation. But inflation could be defined as a sustained rise in general price level. This phenomenon occurs when the aggregate demand in normal value is greater than the real productive capacity of the economy.

2.1.2 Causes of Inflation

According to Friedman (1968) who is a monetarist, inflation is seen as basically a monetary phenomenon which is caused by an increase in the quantity of money supply. It is important to stress that although inflation is a monetary phenomenon. It is caused by both monetary and non-monetary factors.

1. Monetary Factors

i. Excessive money supply: Excessive creation and injection of money into the economy by the monetary authorities could cause inflation. This results to a situation where there is too much money in circulation. This leads to rising prices of goods and services.
ii. When the central bank purchases a lot of treasury bills on the open market. When payments are made by the central bank, this increases the level of money in circulation and inflationary results.
iii. When the central bank reduces the bank rate or discount rate charged on loans obtained by the commercial banks. This will cause the commercial banks to reduce the interest rate charged on loans and advances and this will lead to an increase in demand for money.
iv. Another cause of inflation is the expansionary fiscal action by government. The increase in budgetary expenditure by government contributes in no small measure to inflationary spiral in the economy.

2. Non-monetary factors

i. Increase in demand: Inflation is induced by an increase in the aggregate demand for goods and services. There is always a rise in prices of goods when the aggregate demand exceeds aggregate supply.
ii. Cost of production: Inflation could also be caused by an increase in cost of production of goods. If the cost of raw materials increases, there will be an increase in cost of production and this will have an effect on the prices paid by the final consumers.
iii. Action of Trade Union: Trade unions are always in the habit of demanding for increase in their salaries. If government approves it, it will result inflation to the economy.

2.1.3 Types of Inflation

According to P.B. Dubon 2013, "Introduction to Macro Economics", the types include;

(a) Demand Pull Inflation: This occurs when aggregate demand for goods and services rise faster than aggregate supply. This is when the demand for goods keeps rising without corresponding increase in the supply.
(b) Cost Push Inflation: This is the type of inflation that is induced by rising cost of production. This situation arises when higher production costs are passed on to consumers in the form of higher prices in order to maintain their profit.
(c) Imported Inflation: this result when goods are imported from countries that have rising cost of living. This results to inflation at home when the goods are brought in.
(d) Structural Rigidities: Inflation results when there is a problem in the distribution of goods. The prices of goods may be rising not because there is fall in production but due to the problem of the distribution system.

2.1.4 Effects of Inflation

i. Loss of value of money: The inflationary period is characterized by continuous fall in the purchasing power of money. Each unit of money buy fewer goods. The value of money falls in exact inverse proportion to the increase in the level of prices.
ii. Fixed income earners suffer: A fixed income earner suffers during this period because the rising price makes none sense of their income. It means all their income is consumed and this does not allow for savings.
iii. Penalize money lenders: Money lenders are always penalized because they cannot get the actual value of money since the value of money falls during inflation. Borrowers of money as they will repay less in value of what they borrowed.
iv. Expectation effect: Any anticipation of future price will lead to more purchases or demand for goods today to take advantage of expected price increase.
v. Loss of confidence in money: Money cannot effectively function as a medium of exchange and a standard of deferred payment during inflationary period.

2.2 EMPIRICAL LITERATURE

In a cross-sectional analysis of the origin and development of inflation in some selected African countries including Nigeria carried out by the research department, CBN (1974), covering the period (1960 - 1972), their empirical investigations were limited only to six countries and the explanatory variables they used are money supply, deficit financing and real gross domestic product. The result with respect to Nigeria shows that changes in money supply and domestic credit had no significant impact on inflation rate.

Asoqu (1991), on an extensive review of the literature on inflation in Nigeria with an empirical analysis covering the period (1960 - 1969); came up with result which is in line with Bodin and Mishkin. He expresses that inflation rate is a function of money supply and its togged values, changes in domestic credit, real output, net export and net government expenditure. He maintains that real output especially industrial output, current money supply, domestic food prices and exchange rate changes were the major determinants of inflation in Nigeria.

Delivering a paper at the meeting of the secretary to the government of the federation, Ogwuma 1986, holds a contrary view to Bodin and Mishkin, he said that experience in many countries including Nigeria shows that fiscal policies in particular, intended primarily to stimulate output growth and enhance real income often end up as a major sources of financial imbalances and macro economic instability.

Aso (2004) carried out an empirical test on "An Evaluation of the effect of inflation on the Nigerian Economy covering the period (1980 - 2002)". She used inflation rate and money supply as explanatory variables using OLS regression techniques. She concludes that inflation has significantly affected Nigerian economy.

Udoba (1998) "The Evaluation of the effectiveness of monetary policy in the Nigerian economy" covering the period (1995 - 1997) came up with the result that monetary policy instrument used by the Central bank contributed significantly in achieving some degree of macroeconomic stability. Using data from information financial statistics, Comme (1999), reports that 62 out of 82 countries exhibits a negative correlation between inflation and per capital real output growth. The negative correlation means that there is opposite relationship between inflation and economic growth.

3.0 RESEARCH METHODOLOGY

3.1 Research Design

The analysis in this study is based on time series data for Nigeria’s inflation rate and Gross Domestic Product which is used as a proxy for economic growth. Due to the linear nature of the economic relationship, Ordinary Least Square (OLS) estimation method was employed in obtaining the numerical estimates of the coefficients in the model. Secondary data mainly from the publications of the Central Bank of Nigeria (CBN) namely; CBN Statistical Bulletin and CBN Annual Reports, and Bureau of Statistics publications were used. Simple regression model was used in the estimation. The model sought to investigate the effect of inflation on the economic growth of Nigeria during the period between 1971 and 2011.

3.2 Method of Data Analysis

Following the lead of Almed and Mortaza (2005), the study employs two econometric models to achieve the empirical results. The first econometric model examines the short-run and long-run relationship between real GDP and Inflation rate by applying the Johansen (1998) co-integration test and the associated Error Correction Model (ECM) and the second is the application of the Granger causality test to determine the direction of causality between the two variables.

3.3 Model Specification

The primary model showing the relationship between Growth and Inflation is specified thus:

Abbildung in dieser Leseprobe nicht enthalten

The above model in its explicit form is written as:

Abbildung in dieser Leseprobe nicht enthalten

Where:

GDP = Gross Domestic Product (which is used as a proxy for Economic Growth)

IFR = The rate of Inflation,

β0 = The Constant term

Abbildung in dieser Leseprobe nicht enthalten

β1 = The slope of the slope of the graph and measures the change in the dependent variable as a result of a unit change in the independent variable, IFR.

[...]

Excerpt out of 18 pages

Details

Title
Impact of inflation on economic growth in Nigeria in the context of an emerging market
Grade
A
Author
Year
2016
Pages
18
Catalog Number
V510336
ISBN (eBook)
9783346137623
ISBN (Book)
9783346137630
Language
English
Tags
impact, nigeria
Quote paper
Micah Effiong (Author), 2016, Impact of inflation on economic growth in Nigeria in the context of an emerging market, Munich, GRIN Verlag, https://www.grin.com/document/510336

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