ABSTRACT
This study investigated
the impact of inflation on investment and economic growth in Nigeria. Since
Nigerian financial sector liberalization is anchored on interest rate and
exchange rate deregulation and the inflation targeting monetary policy,
therefore exchange rate was incorporated in the study. The OLX technique was
used in this study to estimate the two models specified in the study. Other
tests such as unit root test and cointegration test were conducted to determine
the stationarity and long term relationship among the variables. The result of
the investigation showed that both inflation has a negative effect on
investment level and economic growth but exchange rate has positive effect on
investment and economic growth. The study recommends that in order to curb
inflation, government should create a conducive employment opportunity,
transparency in the fiscal operations to bring about realistic fiscal deficits,
exchange policy should be designed to bridge the savings investment gap,
enhance government revenue and reduce the fiscal gap in order to ultimately
enhance economic growth which will bring about development.
TABLE
OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Table of Content v – vi
Abstract vii
CHAPTER
ONE
INTRODUCTION
1.1
Background of the Study
1.2 Statement
of the Problem
1.3 Research
Questions
1.4
Objective of the Study
1.5
Research Hypothesis
1.6
Justification of the Study
1.7 Scope
of the Study
1.8 Organization of the Study
CHAPTER
TWO
LITERATURE REVIEW
2.0 Introduction
2.1.
Conceptual
Review
2.1.1. Inflation in Nigeria
2.1.2. Conceptualizing
Investment
2.1.3 Determinants
of Investment in Nigeria
2.1.3. Effect
of Inflation on Investment and Investment Agencies
2.1.4.
Inflation Targeting Monetary
Policy
2.1.5 Challenges
of Domestic Investment in Nigeria
2.1.5. Linkage among Inflation, Investment and
Economic Growth
2.2 Theoretical Review
2.2.1. Monetarist view on
Theory of Inflation.
2.2.2 Keynesian Theory of Inflation
2.2.3.
Rational Expectations Theory
2.2.4 The Theory of Acceleration:
2.2.5 Keynes
Internal Rate of Return Theory of Investment
2.2.6. Profit Theory of Investment
2.2.7 Harrod-Domar Theory
2.3 Empirical Review:
2.4.
Implication
of the Literature Review
CHAPTER
THREE
THEORETICAL
FRAMEWORK AND RESEARCH METHODOLOGY
3.0 Introduction
3.1. Theoretical
Framework
3.2.
Research Methodology
3.2.1 Model
Specification
3.2.2 Source
of Data
3.2.3 Research
Design
3.2.4 Measuring
Variables
3.2.5 Preliminary Tests on Variables of the study
3.3.1 Testing for Normality
3.3.2 Testing for stationary
3.3.4 Model
estimation
3.3.5 Statistical
Criteria for the Ordinary Least Square Estimation:
CHAPTER
FOUR
PRESENTATION
AND INTERPRETATION OF DATA ANALYSIS
4.1 Trend
analysis
4.1.1 Investment
level
4.2 Investment
level and interest rate
4.3 Investment
level and inflation rate
4.4 Investment
level and gross domestic growth rate
4.5 Investment
level and exchange rate
4.1 Presentation of Result
4.1.1 Unit
Root Analysis.
4.1.2 Johansen Co-Integration Test
4.1.3 Error
Correction Model (ECM) For Model 1
4.1.4 Regression
Analysis of the Model 1
4.3. Comparison of Results with Previous Findings
CHAPTER FIVE
SUMMARY
OF MAJOR FINDINGS, CONCLUSION AND RECOMMENDATION
5.1. Summary of Major Findings
5.2. Conclusion
5.3. Recommendations
References
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
One
of the greatest problems facing Nigerian economy today is inflation which is
persistently a complex, economic and social problem of the economy. Inflation
has become a leading topic of discussion in Nigerian families and other
countries of the world. Government’s inability to provide a lasting solution to
this aroused a universal conviction that inflation is inevitable and created
pessimism that government has no power to bring rising price (inflation) trend
to an end. Inflation is not only a serious problem but also has a disquieting
effect on the economic life, political system and the society as a whole. A
situation where the value of money continues to depreciate in terms of value,
there is the tendency for rising prices for available goods and services
generally and such situation is being referred to as inflation. Inflation can
be defined as continuous rise in prices of goods and services. Inflation simply
means too-much money chasing few goods. Inflation in the country has become a
threat to the Nigerian economy particularly to investment and development.
Inflation, always and everywhere, is
primarily caused by an increase in the supply of money and credit. According to American College Dictionary,
inflation is "Undue expansion or increase of the currency of a country."
Inflation can also be defined as the sustained increase in the general level of
prices of goods and services overtime (Adebayo 1999).The
term inflation is often used to describe upward movement in the general level of prices.
Inflation can also be seen as the persistent
and appreciable rise in the general level of prices (Jhingan,
2006). Not every rise in the price level is
termed inflation. Therefore, for a rise in the general price level to be
considered inflation, such a rise must be constant, enduring and sustained.
When the supply of money is
increased, people have more money to offer for goods. If the supply of goods
does not increase—or does not increase as much as the supply of money—then the
prices of goods will go up.
Inflation is generally used to
describe a situation of high and sustained increase in the general price level
of an economy. It is a social malady as well as a pervasive economic
phenomenon. Besides, distorting prices, it erodes savings, discourages
investment, stimulates capital flight, inhibits growth, and makes economic
planning a nightmare and political unrest .
The
problem of how to reduce inflation has been a central issue among policy makers
since the 1970s. Several authorities have attributed it to the expansion of
public expenditure arising from the increase in oil revenue.
Existence of excess aggregate demand can cause
inflation (demand pull inflation). Cost-push inflation arises from upward
pressure of production costs, while structural inflation arises from
constraints such as inefficient production, marketing and distribution systems
in the productive sectors of the economy. Inflation has been apparent in
Nigeria from the outset of our national life. This was propelled in the 1960s
through the “cheap money policy” adopted by the government to stimulate
development after independence.
Inflation can have positive and
negative impact on the economic performance of an economy. Positively,
inflation can lead to a higher sustained growth due to the effect it has on
capital accumulation. Also, through its negative impact on productivity in an
economy, inflation results in adverse effects on economic growth.
Some researchers advocated that,
inflation can lead to uncertainty about the future profitability of investment
project. Hence this lead to more conservative investment strategies than would
otherwise by the case, ultimately leading to lower levels of investment and
development.
In Nigeria, one of the major problem
facing the economy is inflation, the country registered low inflation in the
years immediately after independence. Various macro-economic policies notably
fiscal, monetary and exchange rate had from time to time been adopted to
address this problem of inflation. Unfortunately, these measures have met with
little or no success and this has hindered the achievement of other
macro-economic objectives.
It is in this light that this study
is devoted to identify the impact of inflation on Investment and economic
growth Nigeria.
1.2 STATEMENT OF THE PROBLEM
Since the attainment of independence
of 1960, economic policies have been concerned basically with anti-inflationary
measures aimed at achieving price stability. There is almost a universal
consensus that macroeconomic stability, specifically defined as low inflation
is positively related to development. Indeed, the monetary policy framework
adopted by Nigeria since 1993 has an overriding objective and that is the
achievement of single digit inflation. Monetary and fiscal policies as well as
wage freeze, price control, exchange rate and other measures have been employed
from time to time to stem the tide of sustained increase in the general price
level. In retrospect, it appears that in spite of these efforts; the
achievement of price stability objective has been limited.
Inflation undermines the role of
money as a store of value. It frustrates investments and growth. It also, hurts
people who are retired and living on a fixed income.it is very difficult to
determine how much to produce because business cannot predict the demand for
their product at the higher prices they will have to charge in order to
breakeven. Empirical studies on inflation, investment and development confirm
the long-term inverse relationship between inflation and development. The
negative relationship between inflation and growth has been attributed to the
strong negative association between inflation, capital accumulation and
productivity growth. Consequently, high inflation is said to be harmful to both
investment and hence, real output.
Though most countries aim at keeping
inflation low, it has been volatile in Nigeria in-spite of the consistent
effort of the central bank of Nigeria through its monetary policy that is
geared towards achieving a single-digit inflation rate. For instance, within
the last thirty years (1970 - 2000), inflation rate has fluctuated widely. It
assumed single-digit only in seven years and double in twenty-three years
reaching a peak of 72.8% in 1994 from 57.2% in 1993.
1.3 RESEARCH QUESTIONS
This
study would be guided by the following research questions:
1).
what is the trend of Inflation
in Nigeria?
2).
How does inflation impact on
economic growth in Nigeria?
3).
what is the effect of
Inflation on investment in Nigeria?
1.4 OBJECTIVE OF THE STUDY
The objective of
this study is to examine the impact of inflation on investment and economic
growth. The specific objectives of this study are to:
1). analyze
the trend of inflation and economic growth in the country over the years.
2). investigate the relationship between inflation,
investment and economic growth in Nigeria.
3)
examine the effect of inflation on investment and economic growth in
Nigeria.
1.5 RESEARCH
HYPOTHESIS
The
hypotheses to be tested in the course of this study are stated below:
Ho: Inflation
does not affect Investment in Nigeria.
H1: Inflation
affect Investment in Nigeria.
Hypothesis II
Ho: Inflation
does not affect economic growth in Nigeria.
H1: Inflation
affect economic growth in Nigeria.
1.6 JUSTIFICATION OF THE STUDY
The justification of the study is
that it intends to answer certain questions such as, what are the causes of
inflation in Nigeria, and how can it be related to investment and economic
growth. This answer will form the basis upon which suggestions will be made as
to how inflation can be reduced or eliminated totally or to the minimum level.
1.7 SCOPE OF THE STUDY
This study shall focus on the effect of
inflation on investment and economic growth covering the period between 1980
and 2013. Therefore, this study examines not only the effect of inflation on
investment and development, it will also investigate its effect on other
macroeconomic variables.
1.8
ORGANIZATION OF THE STUDY
This study shall
be divided in five chapters.
I.
Chapter one
Providing a background of the subject
matter justifying the need for the study.
II.
Chapter two
Present related literature concerning
inflation, its causes and effects.
III.
Chapter three
The research methodology
IV.
Chapter four
Data presentation and analyses
V.
Chapter five
Findings and recommendations based on the
findings
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