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PROJECT TOPIC- RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN NIGERIA, USING ECONOMETRIC ANALYSIS

PROJECT TOPIC- RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN NIGERIA, USING ECONOMETRIC ANALYSIS

ABSTRACT

This study examined the empirical relationship between inflation and economic growth using time data from Nigeria for the time period of 1970-2009. On the basis of theoretical and empirical literature, two models were specified to estimation, one to examine the impact of inflation and the other examine the impact of economic growth on inflation. Rate The ordinary Least Square estimation technique was adopted based on its unique properties which make its estimate consistent and reliable. The empirical result revealed that inflation has a native and significant impact on economic growth in Nigeria. On the other hand, the impact of economic growth on inflationary pressure was not statically significant. The study thus recommends appropriate macroeconomic policy to address the issue of inflation in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The word inflation rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects. The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years. Inflation is defined as a generalized increase in the level price, sustained over a long period in an 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 high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. 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 ease, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximized, cost should be minimized One of the main costs is inflation, which has turned into a canker worm eating deep into the nation’s path of economic progress.

However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. The economy faced renewed pressures and some uncertainty towards the end of the year as the C.B.N gradually relaxed its tight monetary policy. Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level.

This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability. The effects of inflation on economic growth will be examined bearing in mind that a country (Nigeria for instance) will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatible with growth.

PROJECT TOPIC- RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN NIGERIA, USING ECONOMETRIC ANALYSIS

1.2       STATEMENT OF THE PROBLEM

There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth. 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. 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 signaling role of relative price changes, the most important guide to efficient economic decision-making Fischer (1993). If inflation is inimical to growth, it obviously follows that policymakers should aim at a low rate of inflation.

But how low should inflation be? Should it be 10 percent, 5 percent, or for that matter, zero percent? Or put in other words, is there a level of inflation at which the relationship between inflation and growth become negative? The empirical test of the impact of inflation on the Nigerian economy which is the subject matter of this study shall provide precise answer to the relationship between inflation and growth and how (he problem could be tackled.

1.3       OBJECTIVES OF THE STUDY

On the basis of the state of problem, the broad objective of this study is to empirically execute the relationship between inflation and economic growth in Nigeria, using econometric analysis.

The specific objectives of this study are to:

  • Identify the causes and examine the pattern of inflation rate in Nigeria over the years;
  • To examine economic growth trend in Nigeria in the period under review;
  • To examine the impact of inflation on the economic growth of Nigeria;
  • To examine the impact of economic growth on inflation rate in Nigeria;
  • Suggest possible policy recommendation on the problem of inflation in the country,
  • To examine the impact of economic growth on inflation in Nigeria.

1.4     RESEARH HYPOTHESES

The hypotheses to be tested in the course of this research work are: Hypothesis I

ho : That there is no relationship between inflation and economic growth of Nigeria.

h1 :   That there is relationship between inflation and economic growth of Nigeria.

Hypothesis II

ho :     That inflation has no significant impact on economic growth in Nigeria.

h1 :     That inflation has a significant impact on economic growth in Nigeria

Hypothesis 111

ho : That economic growth has no significant impact on inflationary pressure in Nigeria.

h1 : That economic growth has a significant impact on inflationary pressure in Nigeria.

1.5     SIGNIFICANCE OF THE STUDY

A vital component, of any move towards macroeconomic stability and growth is an integrated effort towards price stability. This study is significant in the followings ways:

  1. it, would have a direct effect on the efficiency and effectiveness of the use of policy instruments in the stabilization of macroeconomic variables to stimulate production and investment.
  2. it would reveal the remote and immediate causes of inflation in Nigeria
    with due consideration to theoretical foundations.
  3. it would also be an invaluable tool for students, policy makers and institutions that want to know more about the effect of inflation on the Nigerian economy.
  4. it would provide an insight into the growth trend of Nigeria. This will enable us know whether or not Nigeria economic growth is inflationary.

1.6     SCOPE OF THR STUDY

This study is limited to the period between 1970 and 2009 which covered thirty-nine years of policy implementation on inflation in Nigeria. The choice of the period of reference is significant because inflation constituted a matter of serious policy consideration. The period witnessed a steady and positive growth in a the money supply. This period encompasses the major landmarks m our national economy   between   1986 to early part of 2001 stringent economy stabilization          measures were in operative as a result of the dramatic down turn of international oil market. By the middle of 1986, the economy was deregulated and thus came the regime of Structural Adjustment   Programme   (SAP). The last period of    between 1993 and 2009 was a period of the political instability that affects every sector of the economy.

1.7     LIMITATION OF THIS STUDY

 Like every research work in developing countries like Nigeria, the study bedeviled by kick of access to some relevant materials. Most literature that would have been added, were coded and as such could not be accessed.

Furthermore, relevant dates on selected variably were consistent. There were some conflicting data from different sources. However this study was based on data from the Central Bank of Nigeria (CBN) statistical bulletin, which lack data for 2010 and 2011. Hence the period was restricted to 1970-2009.

Also the time limitation also constrained the study. A more elaborate study could not be carried out due to time limitation. Finally, there was also financial constraint. This limited the study to the use of secondary data as primary sources are more expensive.

PROJECT TOPIC- RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN NIGERIA, USING ECONOMETRIC ANALYSIS

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