Impact of Inflation on Economic Growth: Case Study of Nigeria (1970-2013)

ABSTRACT: This study investigates the impact of inflation on economic growth of Nigeria. Typically, this relationship has been analyzed using simple correlations and deterministic models. In this analysis, a tri-variate vector autoregressive (VAR) model is used, incorporating unemployment rate into the framework for analysis, we capture the policy trade-off between managing inflation at a low rate and targeting low unemployment as described by the Phillip curve hypothesis. After checking the series for unit root, we identified that all the variables are stationary at first difference, that is I~(1). In the model, one cointegrating vector that describes the long run interaction of these variables is also estimated. In addition, we estimate the vector error correction model and the result indicates there is convergence among the variables in the long run and that takes about 5 consecutive years. The dynamics of the relationship within the system suggest that there is a one-period temporary shock to consumer price level, which shows that there is a slow positive short run contemporaneous impact on the real GDP of Nigeria. However, this dissipates into a negative and permanent shock after 5-6years. This conforms to the neo-classical theory of sticky prices and short run economic disequilibrium. Keywords: Inflation, Economic Growth, Vector Error Correction, Cointegration, granger Causality and Nigeria. …………………………………………………………………………………………………………………………