EFFECT OF INFLATION ON THE ECONOMY

ABSTRACT

This study examines the effect of inflation on economic growth in Nigeria over the period of thirty eight (38) years from 1980 – 2017. To achieve the objectives of the study, annual time series data on real interest rate (RINR), exchange rate (EXCR), inflation rate (INFL) and gross domestic product (GDP) were collected from National Bureau of Statistics (NBS) and Central Bank of Nigeria (CBN)and were analyzed using Johansen co-integration, vector error correction and robust least square regression models. The co-integration result reveals the existence of one co-integrating equation in the system, suggesting that the variables of the study have a long-run equilibrium relationship. Similarly, the coefficient (-0.034) of the short-run vector error correction model was consistent with the expected negative sign, implying that there is a low speed of adjustment from short-run to long-run equilibrium among the variables of the study. The outcome of the robust least square regression equation indicates that inflation and interest rate were negatively signed, the coefficients were -0.1117 (inflation) and 0.0172 (interest rate). Suggesting that they have decreasing but significant effect on economic growth in Nigeria. Based on the findings, it is therefore recommended, among other thing that demand management policies be adopted in the short-run and both demand management and supply-side policies should be pursuedin the long-run. This is on the basis of the monetarist claim that inflation is always and everywhere, a monetary phenomenon.