INFLATION, INVESTMENT AND ECONOMIC GROWTH IN NIGERIA, WHAT ARE THE THRESHOLD EFFECTS?

Hassan O. Ozekhome ()
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Hassan O. Ozekhome: Department of Economics and Statistics, University of Benin

West African Journal of Monetary and Economic Integration, 2016, vol. 16, issue 1, 1-32

Abstract: This paper empirically examines inflation, investment and economic growth nexus in Nigeria, employing the Neo-Classical Growth Model. Firstly, the impact of the inflation rate on economic growth with the possibility of two threshold levels for Nigeria using annual data from 1980 to 2014 was examined and secondly, non-linearity between inflation and investment is investigated. In particular, the results show evidence of a non-linear relationship with two thresholds (6 percent and 12 percent) between inflation and economic growth. Inflation below the first threshold affects economic growth positively and insignificantly. At moderate rates of inflation, between the two threshold levels, the effect of inflation is found to be negative and significant, and at high rates of inflation, above the second threshold, the marginal impact of additional inflation on economic growth diminishes but is still significantly negative. The results further indicate a non-linear relationship between these two variables with only one threshold at 7 percent. Rate of inflation below the threshold level has positive but insignificant impact, while above the threshold has strong negative and significant impact on investment. Therefore, it is desirable to keep the inflation below 6 percent (first threshold) through sound macroeconomic policies (both monetary and fiscal) because it is at that level it becomes helpful for the achievement of sustainable economic growth and investment.

Keywords: Inflation; Investment; Macroeconomic Stability; Thresholds Effect; Non-linear relationship (search for similar items in EconPapers)
JEL-codes: B22 C18 C30 E22 E31 (search for similar items in EconPapers)
Date: 2016
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