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.
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
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