ABSTRACT
The aim of this paper is to examine the effect of macroeconomic variables which includes inflation rate, interest rate and exchange rate on economic growth of Nigeria. The data for the study were derived mainly from the secondary sources which includes; National Bureau of Statistics, Central Bank of Nigeria Bulletins, Bullions, research and statistics publication and economic report of various issues,the secondary data has been taken for 30 years from 1986 to 2016.Ordinary Least Square statistical technique was used to assess the degree of influence the variables have on each other.The results from ordinary least square (OLS) regression analysis describe that inflation rate had positive and insignificant effect on economic growth. Interest rate had a negative and significant effect on economic growthwhile exchange rate had positive and significant effect on the economic growth. The empirical results derived indicate that all the variables of interest were stationary after their first differencing. The study found co integration relationship between real GDP per capita (economic growth) and its macroeconomic factors. Based on the results and analysis it is suggested that The government should fashion out ways of maintaining the inflation rate at a threshold not exceeding 2-3 percent, Government should guard against increasing interest rate, More export-oriented policies should be pursued by the government while maintaining the floating exchange rate regime.
TABLE OF CONTENTS
PAGE
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables viii
Abstract x
CHAPTER ONE:
INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 5
1.4 Research Questions
5
1.5 Research Hypotheses 5
1.6 Significance of the Study 5
1.7 Scope of the Study 6
1.8 Limitation of the Study
6
1.9 Definition of Terms 7
CHAPTER TWO:
REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 9
2.1.1 Concept of Macroeconomic
Policy 11
2.1.2. Macroeconomic Variable 12
2.1.3 Inflation rate 16
2.1.4 Exchange Rate 19
2.1.5 Economic Growth 20
2.1.6 Interest Rate 22
2.1.7 Money supply 26
2.1.8 Foreign Direct Investment 27
2.2 Theoretical Framework 29
2.2.1 Optimal Currency area (OCA)
Theory 29
2.2.2 Purchasing Power Parity (PPP)
Theory 30
2.2.3 The Monetary Model of Exchange
Rate 30
2.2.4 The portfolio Balance
Approach
31
2.2.5 Economic Growth Theory
31
2.2.6 Endogenous Growth Theory 33
2.3 Empirical Literature 34
CHAPTER
THREE: RESEARCH METHODOLOGY
3.1 Research Design 38
3.2 Area of the Study
38
3.3 Nature and Sources of data 38
3.4 Methods of Data Analysis 39
3.5 Model Specification 41
3.6 Description of Research
Variables 45
3.6.1 Dependent Variable
(Criterion) 45
3.6.2Explanatory or Independent Variable 45
CHAPTER
FOUR: DATA PRESENTATION, DATA ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Data Presentation 47
4.1.1 Gross Domestic Product
(GDP)
48
4.1.2 Inflation Rate 49
4.1.3 Interest Rate 49
4.1.4 Exchange Rate
50
4.2 Data Analysis 51
4.3 Test of Hypotheses
54
4.3.1 Hypotheses One
54
4.3.2 Hypotheses Two
54
4.3.3 Hypotheses Three
54
4.4 Discussion of Findings
55
CHAPTER
FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 57
5.2 Conclusion57
5.3 Recommendations 58
REFERENCES 59
APPENDICES
Appendix A 66
Appendix B
68
LIST OF TABLES
Table 4.1 Data Presentation
48
Table 4.2 Ordinary Least Squares
(OLS) Result 51
Table 4.3 Data Used for Regression
Analysis
59
Table 4.4 Ordinary Least Squares
(OLS) Regression Result 61
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
Nigeria overall economic performance since
independence in 1960 has been decidedly unimpressive. Despite the availability
and expenditure colossal amount of foreign exchange derive mainly from its oil
and gas resources, economic growth has been weak and the incidences of poverty
has increased. The objective of every sovereign nation like Nigeria is to
improve the standard of living of its citizenry and promote economic growth and
development of the country. Due to vicious circle of poverty, the scarcity of
resources and the law of comparative advantage, countries depend on each other
to foster economic growth and achieve sustainable economic development.
Economic growth and development is a fundamental
requisite to economic development. This informs why in Nigeria growth
continuously dominates the main policy thrust of government’s development
objectives. Essentially, economic growth is associated with policies aimed at
transforming and restructuring the real economic sectors. Nevertheless, the
lack of sufficient domestic resources, Savings and investment to support and
sustained the sectors is a major impediment to economic development in the
country because of the gap between savings and investment
(Imimole&Imoughele (2012). Savings provides developing countries (including
Nigeria) with the much needed capital for investment which improved economic
growth and development. Increase in savings leads to increase in capital
formation and production activities that will lead to employment creation and
reduce external borrowing of government.
After independence in 1960, the immediate challenge
that faced the Nigerian economy was how to increase robust economic growth in
order reduce extreme poverty, improve health care, overcome illiteracy, strengthen
democratic and political stability, improve the quality of the natural
environment, diminish the incidence of crime and violence, and become an
investment end of choice for international capital, ceteris paribus. Long-term
broad-based economic growth is essential for Nigeria to increase incomes and
enable her to reach her potential of becoming a significant trade and
investment partner in the world. While rapid growth in China, Malaysia and
India for instance, have lifted millions beyond subsistence living, Nigeria and
many other African countries have, however, experienced the opposite by
recording low growth rates and even, the growth of Nigeria economy is sluggish
compared to the emerging economy in the world.
Acknowledge these, the Nigerian government and policy
makers have embarked on various macroeconomic policies to address these issues.
Some of the policies involved the use of monetary and fiscal policy, export
promotion strategy, imports substitution strategy, NEEDS, Vision 20 20 20, the austerity
measure, etc. The fundamental objectives of the policies include price
stability, maintenance of balance of payments equilibrium, and promotion of
employment, output growth and sustainable development. These objectives are
necessary for the attainment of internal and external balance of value of money
and promotion of long run economic growth.
Monetary policy guides the central bank’s supply of
money in order to achieve the objectives of price stability (or low inflation
rate), full employment, and growth in aggregate income.(CBN, 2014) This is
necessary because money is a medium of exchange and changes in its demand
relative to supply, necessitate spending adjustments. To conduct monetary
policy effectively, the central bank adjusts the monetary aggregates, the
policy rate or the exchange rate in order to affect the variables which it does
not control directly (Abdul, 2013). The instruments of monetary policy used by
the central bank depend on the level of development of the economy, especially
the financial sector. These instruments could be direct or indirect (CBN,
2014).
However, despite these macroeconomic policy measures,
the performance of the Nigerian economy in terms of growth has been dismal.
Available information reveals that the growth of Nigeria economy as at1990 was
8.2% and decrease to 5.4%, 4.6%, and 3.5% in 2000, 2001, and 2002 respectively.
It further increased to 9.6% in 2003 and decrease to 5.8% in 2005 and increased
marginally to 6.4% and 7.3% in 2008 and 2011 respectively 5.39 in 2013, 6.31 in
2014 and 6.0 in 2015. With all these, one cannot but wonder what actually the
macroeconomic determinants of Nigeria economic growth are and the effects of
selected macroeconomic variables on Nigerian economy 1999 to 2016.
1.2
Statement of the Problem
Gross domestic output level of a country is influenced
by all microeconomic and macroeconomic variables, which are all generally
interlinked to measure a country’s economic health. Against this background of
sluggish and volatile rate of economic growth which is accompanied with
declining productivity signals, and Nigeria being a developing economy
characterized by significant debt burden, structural imbalance and
uncertainties, an insight into the determinants of Nigeria’s economic growth as
well as their causal relationship with growth, has become pertinent. There
exists a cumbersome and still growing yet fragmented body of literature which
has tried to investigate the effect of Inflation rate, Interest rate, Exchange
rate and Unemployment on GDP.
Despite the
availability and expenditure colossal amount of foreign exchange derive mainly
from its oil and gas resources, economic growth has been weak and the
incidences of poverty and unemployment, inflation rate, exchange rate as well
as interest rate has been on the increase. The objective of every independent
nation like Nigeria is to improve the standard of living of its citizenry and
promote economic growth and development of the country but due to vicious
circle of poverty, scarcity of resources and the law of comparative advantage,
countries depend on each other to foster economic growth and achieve
sustainable economic development where macroeconomic variable such as exchange
rate, inflation rate, interest rate plays an important role. Exchange rate, as
a price of one country’s money in terms of another, is among the most important
prices in an open economy. It influences the flow of goods, services, and
capital in a country. The volatility in exchange rate causes uncertainty in
environment for investment in that country. The instability in exchange rate
can influence harmfully on the investment in that country, it create
unfavorable environment for investment.
Inflation rate is on a continual increase, one of the
major sources of inflation rate is the rise in oil prices which affect most
area of the Nigerian economy. It is not amazingly that inflation may be
politically expensive for Government. Study has also told that inflation has
been harmful for economic growth. Inflation has negative influence on GDP
growth.
The current of interest rate is high which
is a turn-off for many potential investors as well as existing investors, high
interest rate decreases country gross profit, in turn causes an increase in
unemployment rate. The interest rate and GDP have inverse relation If the
interest rate is higher it decreases the economic growth. The relationship
between interest rate and growth rate is mutually dependent.
Recognizing the above gaps and challenges of the
previously reviewed studies, there is need to re-examine the problem of
economic growth holistically by applying Nigerian time series using modern
analytical econometric techniques such as least regression analysis to see if a
more authentic result could be achieved for effective economic planning.
1.3
Objectives of the Study
The broad objective of this study is to evaluate the
effects of selected macroeconomic variables on Nigerian economy. Specifically,
the study intends to;
1. Determine the effect of inflation rate oneconomic
growth.
2. Access the effect of exchange rate oneconomic
growth.
3. Evaluate the effect ofinterest rate oneconomic
growth.
1.4
Research Questions
1. What is the effect ofinflation rate oneconomic
growth?
2. To what extent does exchange rate impact on economic
growth?
3. How has interest rate affected economic growth?
1.5
Research Hypotheses
In the course of this study, the following research
hypotheses stated in their null forms will be verified;
H01: Inflation rate has no significant effect oneconomic
growth.
H02: Exchange rate has no significant effect oneconomic
growth.
H03: Interest rate has no significant effect oneconomic
growth.
1.6
Significance of the Study
The findings of this study have both empirical and
theoretical significance. Theoretically, the findings of this study will be
beneficial to economic policy makers and the public. To the economic policy
makers, the findings of this study will help them to know the extent to which
their policies on Inflation rate, Interest rate, Exchange rate, Foreign direct
investment Money supply has impacted on the economic wellbeing of the country;
the findings of the study will guide them in formulating better monetary
policies especially on area Inflation rate, Interest rate, Exchange rate,
foreign direct investment for improved economic development. The finding of the
study will be useful to anyone who wishes to understand the extent of
association between Inflation rate, Interest rate, Exchange rate money supply
foreign direct investment and real gross domestic product of Nigeria.
Empirically, this study will contribute to the wealth
of study conducted on the effects of microeconomic variables (Inflation rate,
Interest rate, Exchange rate and Unemployment) on economic growth of Nigeria.
It will be an update on the relationship between microeconomic variables
(Inflation rate, Interest rate, Exchange rate and Unemployment) on economic
growth. Further researchers in this field will find the study as a source of
reference material.
1.7
Scope of the Study
This study on effects of macroeconomic variables on
Nigerian economy covered the period 1986 to 2016. The choice of time from 1986
to 2016 is because the researcher intends to assess the long-term as well as
the short-term relationship between Inflation rate, interest rate, exchange
rate, unemployment rate real gross domestic product of Nigeria. This period was
chosen as it corresponds to the period where uniform and consistent data on the
relevant variables are available. More importantly, this period witnessed
several economic policy regimes.
1.8
Limitations of the Study
This study is limited by some factors which include
difficulty in assessing necessary data. The problem of data is based on our
poor culture of keeping data. In other to overcome this difficulty, the
researcher has to limit the study only five dependent variables which include
inflation, exchange rate, interest rate, money supply and foreign direct
investment from 1986-2016.
1.9
Definition of Terms
Gross
Domestic Product (GDP): GDP is a good indicator of a
country's microeconomic status and development (Haggart, 2000). GDP can be seen
from two sides such as the expenditure approach and the income approach.
Exchange
Rates: Exchange rate is a value that a currency has compared
to another currency (Krugman, 2001). Tiwari (2003) stated that exchange rate
can be divided into two categories, fixed exchange rate and flexible exchange
rate.
Interest
Rates: In the theory of economy, interest rate can be
described as a value that is gained in the effort of a value that has been
saved or invested. These rates will reflect the interaction between exchanges
of money (Patterson danLygnerud, 1999).
Inflation:
Inflation is best described as an increase in price as general, where inflation
decreases purchasing power from a currency (McConnel and Brue, 2008)
Core
Inflation: A measure of inflation that excludes certain items
that face volatile price movements. Core inflation eliminates products that can
have temporary price shocks because these shocks can diverge from the overall
trend of inflation and give a false measure of inflation. This is also the
underlying inflation in a country.
Monetary
Programme: A method of forecasting the net financing capacities
of the individual institutional sector, the key monetary aggregates, the
balance sheet of the Central Bank and the consolidated balance sheet of the
banking system.
Money
Supply: Money supply is the amount of money within a specific
economy available for purchasing goods or services. The broad definition money
supply (M2+) includes currency in circulation, demand deposits, quasi money and
foreign currency deposits.
Foreign
Direct Investment: Foreign direct investment (FDI) is an
investment made by a company or individual in one country in business interests
in another country, in the form of either establishing business operations or
acquiring business assets in the other country, such as ownership or
controlling interest in a foreign company (Investipedia, 2016).
Nominal
Anchor: A government policy that provides stability to an
economy at the expense of some of that government's autonomy. For example, if a
government pegs its currency to another, it reduces the uncertainty in exchange
rates but also gives the government less ability to combat inflation or
otherwise change the money supply.
Recession:
A period of general economic decline; typically defined as a decline in GDP for
two or more consecutive quarters. A recession is typically accompanied by a
drop in the stock market, an increase in unemployment, and a decline in the
housing market.
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