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Research papers on inflation and economic growth

Inflation and Economic Growth: a Review of The International Literature

Social Sciences 8 1: Inflation is a social malady as well as a pervasive economic process whose effects are felt by all and sundry in all sectors of the economy. As such, its growth has been the macroeconomic problem in Nigeria that seems to be intractable. The study adopts an Ordinary Least Square OLS of simple regression model in order to test the impact of inflation on economic growth of Nigeria between 1991 and 2013.

The debate on the effect of inflation on economic growth has remained perennial and has attracted substantial theoretical and empirical efforts. The study recommends that the Nigerian Government should adopt various policy measures both monetary and fiscal to reduce inflation to an acceptable level. The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy.

High inflation is known to have many adverse effects. However, a considerable amount of literature examining the relationship between inflation research papers on inflation and economic growth economic growth in both developed and developing countries are available. Most of the literature arrived at a consensus that one of the fundamental objective of macroeconomic policies in both developed and developing countries is to sustain high All rights reserved This work by Wilolud Journals is licensed under a Creative Commons Attribution 3.

This is because, according to Kingman, 1995a high level of inflation disrupts the smooth functioning of a market economy. However, much less agreement exists about the precise relationship between inflation and economic performance, and the mechanism by which inflation affects economic activity at the macroeconomic level. This has generated a significant debate both theoretically and empirically. A series of studies by Wai, 1959; Bhelia, 1960; and Johansen, 1967 found no conclusive empirical evidence for either a positive or a negative association between inflation and economic growth.

While the structuralists argue that inflation is crucial for economic growth, the monetarists posit that inflation is harmful to economic growth Doguwa, 2012. The two basic aspects of the debate relate to the presence as well as nature of relationship between inflation and growth and the direction of causality. However, the impact of inflation on economic growth cannot be overemphasized.

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Commenting on the inconclusive nature of the relationship between inflation and economic growth, Friedman 1973 noted that some countries have experienced inflation with and without development and vice versa.

Wai 1959 argues that there is no relationship between inflation and economic growth. He noted that growth has been possible without inflation in some countries while in others; there have been inflation without growth. Similarly, Johansen 1967 posits that there is no convincing evidence of any clear association, positive or negative, between the rate of inflation and the rate of economic growth.

He argues that it is not inflation that determines economic growth but the application of knowledge, through technical and managerial change and the improvement of human capacities. The study finds no co- integrating relationship between the two variables. Using Granger Causality test, however, the study established unidirectional causality running from inflation to economic growth.

However, the studies on the nonlinear relationship between inflation and economic growth argue that at low inflation levels, the relationship between inflation and economic growth is non-existent or positive while at higher levels of inflation, the relationship becomes significant and negative. However, despite these plethora of studies both for developing and developed countries, the literature on inflation and economic growth in Nigeria is still very scanty Omoke, 2010.

How much inflation impacted on economic growth in Nigeria still remains a question.

Inflation and Economic Growth

The main thrust of this paper, therefore, is to empirically examine the impact of inflation on the economic growth in Nigeria using the Ordinary Least Square method and to examine the Causality amongst the variables using the Granger Causality Approach. The long-run relationship of the variables is evaluated using Johansen Co-integration analysis. The rest of the study is organized as follows.

Section 2 presents the review of related literature, section 3 discloses the methodology for data analysis, section 4 discussions and interpretation of the results is undertaken while section 5 research papers on inflation and economic growth the conclusions and recommendations. The growth theory literature on inflation-growth nexus in the 1950s emphasized the positive impact of inflation on the rate of economic growth while the costs of inflation detailed in Fisher and Modighani 1978 suggested a All rights reserved This work by Wilolud Journals is licensed under a Creative Commons Attribution 3.

Other strands of related literature have also argued that the negative relationship between inflation and growth is not universal and hence non-linear. Many studies, for example, Paul et al 1997CBN 1974Barro 1995Malla 1997 etc used annual data for some countries to examine the inflation-growth nexus, and found mixed evidences as the relationship was negative in some countries and positive in others. A study by Kremer, et al 2009 using panel data from 63 countries both industrial and non-industrial countries confirmed the effect of inflation on long-term economic growth.

Their findings revealed that inflation affected growth when it exceeded 2 percent threshold for industrial countries and 12 percent for non-industrial countries, and that below these levels, the relationship between inflation and economic growth was significantly positive. Another study by Mallik and Chowdhury 2001 examining the relationship between inflation and GDP growth for four South Asian countries Bangladesh, India, Pakistan and Sri Lanka found that a long-run positive relationship exists between GDP growth rate and inflation for all four countries.

There are also significant feedbacks between inflation and economic growth as moderate inflation was found to be helpful to economic growth. In another study by Ayyoub, Chaudhry and Farooq 2011a research papers on inflation and economic growth and significant inflation growth relationship is found to exist in the economy of Pakistan. The result of the study shows that prevailing inflation is harmful to the GDP growth of the economy after a certain threshold level.

Salian and Gopal Kumar 2010 maintain that there is a long-run negative relationship between inflation and GDP growth rate in India. Faria and Carneiro 2001 investigated the relationship between inflation and economic growth in the context of Brazil which has been experiencing persistent high inflation until recently. Analyzing a bivariate time series model that is, vector autoregression with annual data for the period between 1980 and 1995, they found that although there exist negative relationship between inflation and economic growth in the short-run, inflation does not affect economic growth in the long-run.

Their empirical results also support the superneutrality concept of money in the long run. This in turn provides empirical evidence against the view that inflation affects economic growth in the long run.

Hodge 2005 conducted a study on the relationship between inflation and growth in South Africa in order to test whether South African data support the findings of Gross-section studies that inflation has long-run negative effect on growth. According to Hodge 2005inflation drags down growth over the long-term, while in the short-run, growth above its trend requires accelerating inflation. Seleteng 2006 in his study seeks to estimate the optimal level of inflation, which is conducive for economic growth in Lesotho, using quarterly time-series data set for the period of 1981 to 2004.

Research papers on inflation and economic growth

The estimated model suggests a 10 percent optimal level of inflation above which, inflation is detrimental for economic growth.

Bruno and Easterly 1998 investigated possible relationship between inflation and economic growth using cross country data and found that inflation has negative effect on medium to long term economic growth and showed that the relationship in influenced by countries with extreme values. Ahmed and Mortaza 2005 believe that moderate and stable inflation rates promote the development process of a country, and hence economic growth as it supplements return to savers, enhances investment, and therefore, accelerates economic growth.

However, it is observed that under modern capitalist economy, inflation remains the central contradiction of economic growth. A neoclassical economist Tobin 1965on his own view holds that inflation affects the economic growth and performance. Tobin 1965 postulates that an increase in inflation can result in high output, while Sidrauski 1967 showed that an increase in inflation does neither affect neither output nor economic growth.

A study to ascertain the existence or not of a relationship between inflation and economic growth in Nigeria was carried out by Omoke 2010. The study employed the cointegration and Granger Causality test while consumer price index CPI was used as a proxy for inflation and the GDP as a perfect proxy for economic growth to examine the relationship.

The result of the test showed that for the periods, 1970-2005, there was no cointegrating relationship between inflation and economic growth for Nigeria data.

The results showed the same at different lags. Unidirectional causality was seen running from inflation to research papers on inflation and economic growth growth showing that inflation indeed has an impact on growth.

Also Chimobi 2010 used Nigerian data on CPI and GDP for the period 1970-2005 to the existence or not, of a relationship between inflation and economic growth and its causality. He adopted the Johausen-Juselius cointegration technique and Engle-Granger causality test. A stationarity was found at both 1 and 5 percent level of significance. After testing for causality at two different lag periods lag 2 and lag 4he found the result suggesting unidirectional causality running from inflation to economic growth.

  1. If the ADF test statistic is less than Mackinnon critical values, then we conclude that there is no unit root and thus reject the null hypothesis H0 and vice versa. Cambridge Journal of Economics, 30.
  2. Thus, the study maintained that the unidirectional causality found is an indication that inflation indeed impacts on economic growth. The table represents a sample of the inflation and economic growth of Nigeria.
  3. The study finds no co- integrating relationship between the two variables.
  4. In other words the model must be homoskedastic.
  5. Breusch-Pagan-Godfrey shows that the prob F-stat is 0.

Thus, the study maintained that the unidirectional causality found is an indication that inflation indeed impacts on economic growth. They explained that above this threshold, inflation impacted negatively on the growth performance of the economy while below it, the inflation-growth relationship is significantly positive. In examining the impact of inflation on economic growth and development in Nigeria between 1970 to 2010,Umaru and Zubairu 2012 found that inflation possessed a positive impact on economic growth through encouraging productivity and output level and on evolution of total factor productivity.

The foregoing review reveals that there is a nexus between inflation and economic growth.

Therefore, the impact of inflation on economic growth of Nigeria is the target of this study. The data is analysed using E-View software package. Test of statistical significance are conducted using the F-statistics test, t-test, unit root test and co-integration test.

These tests are essential in testing the reliability of the parameter estimates. Adopting a log-linear specification taking the natural logarithm both sides of the equation and assuming linearity among the variables give. There will be no serial autocorrelation in the model. The residual must be normally distributed. There will be no heteroskedasticity in the model. In other words the model must be homoskedastic.

When all these conditions are met, the model will be regarded as the best regression model to explain the relationship between RGDP and INF. It is used to test the significance of the parameter estimate at a certain level of significance.

It can test for null hypothesis against the alternative hypothesis. If the probability at which T is significant in our regression results for any independent is less than or equal to our chosen level of significance 0. This invariably means research papers on inflation and economic growth the alternative hypothesis H1 which states that the independent variable in question is statistically significant in our model. This measures the statistical significance of explanatory variable s in the model, which is calculated thus: In this case, the results suggest significant relationship between the variables.

It is formulated thus: This means, they have stochastic trend Johansen, 1999. This test is used to check if the independent variable s can predict both at present short-run or future long-run. Co-integration of two or more time series suggests that there is a long-run or equilibrium relationship between them Gujarati and Porter, 2009.

This study adopts Johansen Co-integration test. As inflation increases, economic growth is retarded. This states that economic growth in Nigeria is positively correlated or impacted by inflation. The table represents a sample of the inflation and economic growth of Nigeria: An impact Analysis from 1991-2013.

The coefficient of determination R2 is 0. The goodness of fit however explains that there exists a weak relationship between these variables, that is, seventeen per cent of distortion in LRGDP is caused by unstable economy and not suitable for analyzing the relationship that existed between the real GDP and the independent variables used in the model. T- Statistics The test is carried out, to check for the individual significance of the variables which statistically, the t-statistics of the variable under consideration is interpreted based on the following statement of hypothesis.

The estimated parameters are not significant. The estimated parameters are significant. The T-statistics is summarized in Table 2: Test From the regression analysis, the value of F-calculated is 10.