ABSTRACT
Economists tend to emphasize that
inflation causes economic damage by distorting investments and consumption
decisions. These distortions could result from households and businesses’ uncertainty
about the effect of increases in prices of goods and services. When inflation
is stable, people are likely to have the same anticipation of its future level,
however, when inflation is volatile, future expectations will be uncertain
thereby hindering the ability to forecast with certainty. Investment is an
indispensable aspect of any economy as it drives the productive sectors of the
economy, however, the confidence to invest is eroded in at an atmosphere of
uncertainty in future prices of goods and services as a result of inflation, it
poses economic problem to that economy. The problem posed by inflation on
investment affects both the private and public sectors of the economy. It
triggers prices of goods and services if not properly managed as well as reduce
the zeal for investment; it increases the cost of doing business such as
increases in transaction cost, information cost and these inhibit economic
growth and development. It is against this background that this study examined;
the impact of inflation on core credit to the private sector of the Nigerian
economy, the impact of inflation on foreign exchange availability for private
sector investment in the Nigerian economy, the impact of inflation on
non-infrastructural investment of the public sector of the Nigerian economy and
the impact of inflation on infrastructural investment of the public sector of
the Nigerian economy. Time series data for 25years, 1987-2011 were collated
from Central Bank of Nigeria
published annual reports and statistical bulletin for the country aggregate
data. Four hypotheses were formulated
and the least square (LS) regression was used to estimate the effects of
Inflation on Investment in Nigeria.
The annual rate of inflation was adopted as the independent variable for the
four hypotheses while dependent variables were Core Credit to the Private
Sector, Foreign Exchange for Import, Non-infrastructural Investment and
Infrastructural Investment for the four hypotheses. The findings from the study
revealed inflation has negative and non-significant impact on the core credit
to private sector in Nigeria (coefficient of inf = -1.216, t-value = -0.948).
Inflation has positive and non-significant impact on the foreign exchange
availability in Nigeria
(coefficient of inf = 0.013, t-value = 0.291). Inflation has negative and
non-significant impact on the non-infrastructural investment in Nigeria
(coefficient of inf = -0.33, t-value = -1.107). Inflation had negative and
significant impact on infrastructural investment (coefficient of inf = -0.386,
t-value = -3.637). The study thus recommends among others that monetary policy
authorities should ensure that policies that will assist in maintaining a
stable general price level are pursued. This will guarantee a steady growth in Nigeria.
TABLE
OF CONTENTS
Title Page. . . . . . . . . . i
Declaration Page. . . . . . . . . ii
Approval Page. . . . . . . . . iii
Dedication. . . . . . . . . . iv
Acknowledgements. . . . . . . . . v
Abstract. . . . . . . . . . vi
List of Tables. . . . . . . . . . x
List of Figures. . . . . . . . . xi
Chapter One Introduction. . . . . . . . 1
1.1 Background of the Study. . . . . . . 1
1.2 Statement of Problem. . . . . . . 3
1.3 Objectives of the Study. . . . . . . 4
1.4 Research Questions. . . . . . . . 4
1.5 Research Hypotheses. . . . . . . . 5
1.6 Significances of the Study. . . . . . . 5
1.7 Scope of the Study. . . . . . . . 6
1.8 Operational Definition of Terms. . . . 6
References. . . . . . . . . 8
Chapter Two Review of Related Literature. . . . 10
2.1 Theoretical Reviews. . . . . . . 10
2.1.1 Theories of Inflation. . . . . . . . 10
2.1.2 Other Theories of Inflation. . . . . . 11
2.1.3 Investment and Its Purpose. . . . . . 14
2.1.4 Measures of Inflation. . . . . . 14
2.1.5 Types and Forms of Inflation. . . . . . 15
2.1.6 Causes of Inflation in Nigeria. . . . . . 17
2.1.7 Effects of Inflation in Nigeria. . . . . 19
2.1.8 Controls of Inflation in Nigeria. . . . . 22
2.1.9 Effects of Inflation on Investment in Nigeria. . . 24
2.2 Empirical Review. . . . . . . 25
2.2.1 Inflation, Macroeconomic Stability and Growth. . . 25
2.2.2 Inflation on Household Consumption. . . . 27
2.2.3 Macroeconomic Effects on Private Investment:
Theory and Evidence. 29
2.2.4 Inflation and Economic Growth. . . . . 34
2.2.5 Inflation and Its Effect on Stock Prices. . . . 38
References. . . . . . . . . 42
Chapter Three Research Methodology. . . . 47
3.1 Research Design. . . . . . . . 47
3.2 Nature and Sources of Data. . . . . . 47
3.3 Model Specification . . . . . . . . 47
3.4 Model Justification. . . . . . . . 48
3.5 Explanatory Variables. . . . . . 49
3.5.1 Independent Variable. . . . . . . 49
3.5.2 Dependent Variables. . . . . . . . 49
3.6 Techniques of Analysis. . . . . . . 51
References. . . . . . . . . 52
Chapter Four Data Presentation and Analysis. . . 53
4.1 Data Presentation. . . . . . . . 41
4.2 Test of Hypotheses. . . . . . . . 62
4.2.1 Test of
Hypothesis One. . . . . . . 62
4.2.2 Test of
Hypothesis Two. . . . . . . 63
4.2.3 Test of Hypothesis Three. . . . . . 64
4.2.4 Test of
Hypothesis Four. . . . . . . 65
4.3 Discussion of Findings. . . . . . . 66
References. . . . . . . . . 69
Chapter
Five Summary of Finding, Conclusion and
Recommendations.
5.1 Summary of Findings. . . . . . . 70
5.2 Conclusion. . . . . . . . . 70
5.3 Recommendations. . . . . . . . 71
Appendixes. . . . . . . . . 73
Bibliography. . . . . . . . . 78
LIST OF TABLES
Table 4.1 Quantum and Ratio Values of GDP, CCPS and INF. .53
Table 4.2 Quantum and
Ratio Values of Reserves, Import Bills and Inflation Rate.
Table 4.3 GDP, Non Investment Infrastructural
Investment and Inflation Rate. .
Table 4.4 GDP Infrastructural Investment and Inflation Rate. .
Table 4.5 Regression Results of hypothesis One. . . .
Table 4.6 Regression Results of hypothesis Two. . . . .
Table 4.7 Regression Results of hypothesis Three. . . .
Table 4.8 Regression Results of hypothesis Four. . . .
LIST OF FIGURES
Figure 2.1: Keynesian Theory of Inflation. . . . . .
Figure 4.1 Ratio Values
of Inflation Rate and Core Credit to the Private Sector. .
Figure 4.2 Ratio Values of inflation rate and reserves/import. .
Figure 4.3 Ratio values
of non-infrastructural investment and inflation rate from 1987 to 2011. . . . . . . . .
Figure 4.4 Infrastructural investment and inflation rate from 1987 to 2011. . .
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Some recent
studies have found cross-country evidence supporting the view that long -term
growth is adversely affected by inflation (Kormendi and Meguire 1985; Fischer
1983, 1991, 1993; De Gregorio 1993; Gylfason 1991; Roubini and Sala-i-Martin
1992; Grier and Tullock 1989; Levine and Zervos 1992). Countries (especially in
Latin America) that have experienced high inflation rates, have also witnessed
lower long-term growth (Cardoso and Fishlow 1989; De Gregorio 1992a, 1992b).
This literature is part of the endogenous growth literature, which tries to
determine the causes of differences in growth rates in different countries.
There is now considerable evidence that investment is one of the most important
determinants of long-term growth (Barro 1991; Levine and Renelt 1992). It has
often been suggested that a stable macroeconomic environment promotes growth by
providing a more conducive environment for private investment. This issue has
been directly addressed in the growth literature in the work by Fischer 1991,
1993; Easterly and Rebelo 1993; Frenkel and Khan 1990; and Bleaney 1996. Among
the reasons why high inflation is likely to be adverse for growth are:
economies that are not fully adjusted to a given rate of inflation usually
suffer from relative price distortions caused by inflation. Nominal interest
rates are often controlled, and hence real interest rates become negative and
volatile, discouraging savings. Depreciation of exchange rates lag behind
inflation, resulting in variability in real appreciations and exchange rates;
real tax collections do not keep up with inflation, because collections are
based on nominal incomes of an earlier year (the Tanzi effect) and public
utility prices are not raised in line with inflation. For both reasons, the
fiscal problem is intensified by inflation, and public savings may be reduced.
This may adversely affect public investment and high inflation is unstable.
There is uncertainty about future rates of inflation, which reduces the
efficiency of investment and discourages potential investors.
The effect of
macroeconomic instability on growth comes largely from the effect of
uncertainty on private investment. Multi-country panel data studies on
investment report that measures of macroeconomic instability, like the
variability in the real exchange rate or the rate of inflation, have an adverse
impact on investment (Serven and Solimano 1992). In a study of 17 countries,
Cordon (1990) finds that although there are outliers, evidence generally
supports the view that high growth is associated with low inflation. This is
suggested both by cross-country evidence and comparison over time for countries
where the rate of growth has fallen in relation to an increased as the rate of
inflation.
Fischer (1993)
examines the role of macroeconomic factors in growth. He found evidence that
growth is negatively associated with inflation and positively associated with
good fiscal performance and undistorted foreign exchange markets. Growth may be
linked to uncertainty and macroeconomic instability where temporary uncertainty
about the macro-economy causes potential investors to wait for its resolution,
thereby reducing the investment rate (Pindyck and Solimano 1993). Uncertainty
and macroeconomic stability are, however, difficult to quantify. Fischer
suggests that, since there are no good arguments for very high rates of
inflation, a government that is producing high inflation is a government that
has lost control. The inflation rate thus serves as an indicator of
macroeconomic stability and the overall ability of the government to manage the
economy.
Fischer found
support for the view that a stable macroeconomic environment, meaning a
reasonably low rate of inflation, a small budget deficit and an undistorted
foreign exchange market, is conducive to sustained economic growth. He presents
a growth accounting framework in which he identifies the main channels through
which inflation reduces growth. He suggests that the variability of inflation
might serve as a more direct indicator of the uncertainty of the macroeconomic
environment. However, he finds it difficult to separate the level of inflation
from the uncertainty about inflation, in terms of their effect on growth. This
is because the inflation rate and its variance are highly correlated in
cross-country data. Evidence is in favour of the view that macroeconomic
stability, as measured by the inverse of the inflation rate and the indicators
of macroeconomic trends, is associated with higher growth.
A good number of
factors have been identified as the causes of inflation in Nigeria, which
according to Nwankwo (1981) they includes excess demands, rising cost of
production, limiting outputs and increasing money supply. People’s immediate
concern is with how their income holds up with changes in their expenses.
Businesses care about how the prices of their product do in relation to their
cost. Also government battle with polices to keep inflation rate at the barest
minimum and ensure effective and efficient administration.
In terms of
geography, there are very few studies on the impact of inflation on investment
in this part of the world, hence this study fill this gap in terms of
geography. Given government recent wooing of international investor into the
country, the need to examine the impact of inflation on investment becomes
imperative. The Central Bank of Nigeria main policy objective is to maintain
stable price of goods and services. This study thus examines the impact of
inflation on investment.
1.2 STATEMENT OF P
