An Evaluation of the Optimal Inflation Target for Economic Growth in Nigeria

Joseph Ifeolu Falegan and Ebele Amali

Journal of Social Science Studies, 2023, vol. 10, issue 1, 1

Abstract: This study uses the threshold regression method to determine the optimal inflation threshold for economic growth in Nigeria. There is evidence that establish that setting an inflation target as a nominal anchor that constrains price movements to a particular point or within a pre-agreed range is indispensable for economic growth. Application of the Bai-Perron structural breakpoints test to the data detected two breaks dated 1999 and 2011. The Lee-Strazicich Unit Root Test showed that the data were cointegrated. The threshold estimation for optimal inflation values in the 5% to 25% band revealed that the residual sums of squares, RSS, is minimized and the R2 is maximized at an optimal inflation threshold of 18% with a statistically significant regression model, suggesting that the optimal inflation target for economic growth in Nigeria is 18%. The Autoregressive Distributed Lag model (ARDL) estimate shows that a 1% increase in inflation leads to an increase of 0.017% GDP growth in Nigeria in the long-run. The estimation of the ARDL model indicate that the coefficients of exchange rate, trade openness and population growth present mixed signaling in relation to GDP growth in the long- and short-run. Our results indicate that the implementation of the inflation targeting framework in a credible, transparent and accountable way could help to anchor inflation expectations, rein in inflation and improve economic growth in Nigeria.

Date: 2023
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