Effect of Inflation Rate and Investment on Economic Growth in Nigeria

Abstract

Using the Neo-Classical Growth Model, this research experimentally investigates the relationship between Nigerian economic growth, investment, and inflation. First, using annual data from 1980 to 2021, it was evaluated how the inflation rate affected economic growth in Nigeria, with the potential of two threshold levels. Next, it was determined whether the relationship between inflation and investment was nonlinear. Particularly, the findings indicate that there is a non-linear link between inflation and economic growth, with two thresholds (6 percent and 12 percent). Below the first barrier, inflation has a small but positive and important impact on economic growth. The effect of inflation is found to be negative and significant at moderate rates of inflation, between the two threshold levels. At high rates of inflation, above the second threshold, the marginal impact of extra inflation on economic growth lessens but remains notably negative. The results also show that there is just one threshold at 7% and that there is a non-linear relationship between these two variables. Investment is significantly impacted negatively by inflation rates beyond the threshold, but positively by inflation rates below it. Therefore, it is preferred to maintain inflation below 6% (the first criterion) by smart macroeconomic policies in order to promote sustained economic development and investment (both monetary and fiscal).

Keywords: Inflation, Investment, Macroeconomic Stability, Thresholds Effect, Non-linear relationship