Inflation and Economic Growth: An Estimate of the Threshold Level of Inflation in Nigeria

Abstract

This study investigated the relationship between inflation and economic growth in Nigeria, from 1970 to 2009. It adapted the Khan and Sendhadji’s (2001) threshold regression technique to examine the existence of optimal inflation. The Granger causality test was utilised to test the causal relationship between inflation and growth. The results revealed a unidirectional causality, moving from inflation to real GDP, with no response from output growth to inflation. The findings from the threshold model showed a negative relationship between inflation and growth. The estimated threshold regression model indicated eight per cent as the optimal level of inflation consistent with sustainable economic growth in Nigeria. The study corroborated the idea of a single digit inflation being pursued by the monetary authorities in Nigeria.

Keywords: Inflation, Economic growth, Threshold regression, Nigeria.
JEL Classification: C50, E31, O40