Currently, economists seem to agree that high rates of inflation cause â€œproblems,â€ not just for some individuals, but for aggregate economic performance. However, much less agreement exists about the precise relationship between inflation and economic performance, and the mechanism by which inflation affects economic activity.
Motivated by these questions, this research first examines the relationship between inflation and economic performance in Nigeria by using data over the period 1970-2005.
The methodology employed in this study is the cointegration and Granger causality test. Consumer price ind ex (CPI) was used as a prox y for Inflation and the GDP as a perfect proxy for economic growth to examine the relationship. The scope of the study spanned from 1970 to 2005. A stationarity test was carried out using the Augmented Dickey-Fuller test (ADF) and Phillip-Perron test (PP). and stationarity found at first difference at 1% and 5% level of significance. The Johansen-Juselius co-integration technique employed in this study proved to be superior to the Engle and Granger (1987) approach in assessing the co-integrating properties of variables, especially in a multivariate context. The result of the test showed that for the periods, 1970-2005 , there was no co-integrating relationship between Inflation and economic growth for Nigeria data.
Further effort was made to check the causality relationship that exists between the two variables by employing the VAR-Granger causality at two different lag periods. The results showed the same at different lags. The first test was conducted using lag two (2) and in the result unidirectional causality was seen running from Inflation to economic growth. Further test at lag four (4) was carried out and it only supported the first by also indicating a unidirectional causality running from Inflation to economic growth. Various studies as reviewed in the literature came out with the result that high inflation is and has never been favourable to economic growth. Hence, the study through the empirical findings maintain the fact that the causality that run from inflation to economic growth is an indication of relationship showing that Inflation indeed has an impact on growth.
TABLE OF CONTENT
TABLE OF CONTENT
1.2STATEMENT OF PROBLEM
1.3BACKGROUND OF STUDY
1.4OBJECTIVES OF STUDY
1.5SIGNIFICANCE OF STUDY
1.6SCOPE OF STUDY
2.2SOME EMPIRICAL EVIDENCE ON THE INFLATION-GROWTH RELATIONSHIP
2.3THEORETICAL CONSIDERATIONS ABOUT THE NONLINEAR GROWTH-INFLATION RELATIONSHIP
2.4 EMPIRICAL EVIDENCE FOR THE MECHANISM THROUGH WHICH INFLATION CAN ADVERSELY AND NONLINEARLY AFFECT INFLATION
3.3DATA DESCRIPTION AND SOURCES
3.4.1UNIT ROOT TEST
3.4.2THE CO-INTEGRATION TEST
3.4.3GRANGER CASUALITY TEST
DATA AND EMPIRICAL RESULTS
4.1UNIT ROOT TEST RESULTS AND ANALYSIS
4.2 CO-INTEGRATION TEST RESULT AND ANALYSIS
4.3GRANGER CAUSALITY TEST ANALYSIS
5.1SUMMARY AND CONCLUSION