ABSTRACT
This study investigated the problems 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 - ii
DECLARATION - iii
CERTIFICATION -
DEDICATION - v
ACKNOWLEDGEMENTS - vi
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
3.2.2. 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 problems 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 problems 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 problems 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 problems 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 problems 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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