Impact of inflation on economic growth in Nigeria – A causality test

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 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 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”.

Keywords: Inflation, economic growth, granger causality, error correction model