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Inflation Thresholds and Economic Growth: Evidence from Nigeria

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  • Kazeem Bello Ajide
  • Olukemi Lawanson

Abstract

Inflation is one of the most challenging macroeconomic objectives capable of frustrating every pragmatic effort at achieving other macroeconomics goals if not curtailed. To this end, the paper empirically examines the threshold inflation rate that is considered optimally reasonable for maintaining a sustainable economic growth. The study in specific terms employs a least square multivariate approach to estimate a threshold level of inflation. Further, error correction modeling (ECM) approach was explored to identify the long run relationship among other major determinants of real GDP growth using a simple augmented production function. In addition, a pairwise granger causality test was conducted to explore the causal link between the inflation and growth of real GDP. Interestingly, it was observed from the causality test that there was neither bidirectional nor unidirectional causality between the two but rather an independent relationship. The findings from least square estimation also established 9% threshold inflation level. The results from ECM confirmed the values of lagged of real GDP growth rates, investment, current inflation, population growth and terms of trade as important factors affecting growth rates of real GDP in Nigeria. Based on the outcome of the results it was therefore suggested that an identification of country-specific inflation thresholds in the inflation-growth relationship might provide useful information about the appropriate location and width of an inflation targeting band.

Suggested Citation

  • Kazeem Bello Ajide & Olukemi Lawanson, 2012. "Inflation Thresholds and Economic Growth: Evidence from Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(7), pages 876-901.
  • Handle: RePEc:asi:aeafrj:v:2:y:2012:i:7:p:876-901:id:938
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    Cited by:

    1. Yaya O. S. & Akintande O. J. & Ogbonna A. E. & Adegoke H. M., 2019. "Cpi Inflation In Africa: Fractional Persistence, Mean Reversion And Nonlinearity," Statistics in Transition New Series, Polish Statistical Association, vol. 20(3), pages 119-132, September.
    2. Mohammad Mirbagherijam, 2014. "Thresholds Effect of Money Growth on Inflation in Iran," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(9), pages 319-329, September.
    3. Boniface Yemba & Erick Kitenge & Paul Woodburne, 2020. "Nonā€linear Effects of Inflation on Economic Growth in the Democratic Republic of the Congo," South African Journal of Economics, Economic Society of South Africa, vol. 88(4), pages 536-550, December.

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