An Analytical Study of the Impact of Inflation on Economic Growth in Nigeria (1970-2016)

Inflation discourages savings and investment, it favours debtors at the expense of creditors, fixed income earners are worse off during inflation and it leads to unfavourable balance of payment as the export becomes dearer while import becomes cheaper. The objective of this paper is to analyse the impact of inflation on economic growth in Nigeria for the period 1970 to 2016. The unit root properties of the series were tested. The result shows that the variables are I(0) and I(1). Therefore, the paper employed ARDL approach to co-integration and error correction mechanism (ECM) to test both the short and long run impact of inflation on economic growth. The result shows that inflation and foreign exchange have positive impact on economic growth both in the short and long run. The impact of foreign exchange on economic growth became negative at lag 1 and 2 in the short run. The model is free from auto correlation and heteroscedasticity and the model is stable. The Granger causality shows that inflation and foreign exchange rates do not Granger cause economic growth. The paper recommends inflationary targeting at single digit.