Assessment of the Effect of Inflation on Nigeria’s Economic Growth: Vector Error Correction Model Approach

Abstract

The study examined the effect of inflation on Nigeria’s economic growth for the period ranging from 1980 to 2015. Cointegration approach, vector error correction model (VECM) and Granger causality test were employed in the analysis. Variables engaged in the study involve real gross domestic product (RGDP), inflation rate (INFR), government investment expenditure (GINVXP), private investment expenditure (PINVXP) and total export (TEXP). The results of cointegration test showed evidence of long-run relationship among the selected variables. The VECM results demonstrated that inflation affect Nigeria’s economic growth negatively and insignificantly. More so, it was shown in the results that GINVXP and TEXP have significant and negative effect on RGDP. The results also indicate that PINVXP has significant and positive influence on RGDP. Similarly, the results of the Granger causality test revealed no causation between inflation rate and real GDP. The implication of these results is that while government economic measures aimed at improving public spending on both private and public investments leads to increase real GDP, such measure does not lead to solving Nigeria’s inflation problems. In view of the above, the study therefore recommends as follows: that government may reconsider the over reliance in its spending on public and private investments in solving inflation problems in Nigeria, as there are other factors responsible for high inflation in the economy. Similarly, government is advised to pursue vigorously the economic policies targeted at improving economic growth because that will help to reduce high inflation in the economy. Furthermore, government is by this study advised to increase its capital budget spending on public investment projects, and as well create business friendly environment for private investment in Nigeria. In so doing, significant economic growth will be achieved and sustained in the Nigerian economy.

Keywords: Inflation, Economic growth, Cointegration, Vector error correction model, Granger causality