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THE EFFECT OF INFLATION AND INTEREST RATE ON ECONOMIC GROWTH OF NIGERIA (A CASE STUDY OF FIRST BANK)
The main objective of this study is to investigate the effect of inflation and interest rate on economic growth of Nigeria. Unit root test (Augmented Dickey- Fuller test) has been exploited to check the integration order of the variables. Acointegration analysis with four variables (c growth, interest rate, GDP, and inflation level) is employed. Study adopted Johansen test. Findings indicated that both trace test and max eigenvalue static showed that the four equations have significant existent 1% or 5%. It means that all variables have long term equilibrium relationship. Study adopted the same four variables to discuss Granger Causality relationship; findings indicated that inflation causes interest rate. On the other hand all other variables are independent with each other. Regressionwas conducted to test growth rate with interest rate which showed that current interest rate has an influence power on growth rate. Also, regression used to test growth rate with inflation rate; it showed that inflation rate has influence power on growth rate. Finally regression used to test GDP, interest rate, and inflation rate together; results have shown that current GDP and one lag GDP have influence power to growth rate.
Keywords: Inflation, Economic Growth, Interest Rate, GDP JEL Classification: E31, 040, E43, E01
Economic growth of any country reflects its capacity to increase production of goods and services. The simplest definition of economic growth can be stated as the increase in the Gross Domestic Product (GDP) of that country. Nominal GDP is usually adjusted for inflation factor to reflect real GDP. Interest rate is one of the macroeconomic growth factors; it's up and down volatility is closely related with inflation rates. Its high or low rates also impact the economic boom (high GDP) and extending to influence economic growth rate. In business fields, it is very important to accurately predict interest rate trends. Many previous studies have assumed that the time series data is stationary and they ignored that non stationary could exist in the variables. This study is a contribution to the existing literature on real growth applied toNigeria 's economy; it will examine the effect of interest rate, inflation, and Real GDP on the real growth rate of Nigeria 's economic. Study is concerned to analyze:
- The relationship between Interest rate and inflation rate,
- The relationship between GDP and economic growth rate.
- The Effect of Interest rate, Inflation rate, and R. GDP, on Real Economic Growth Rate.
Samuelson (1973), defines inflation as “a general rising prices for breeds, cars, haircut, rising wages, rent etc. Onwukwe (2003), on his side defines inflation as “a significant and sustained rise in the general price level or a declining value of the monetary units.
The problem created by the rising prices of goods and services has become two difficult for government to solve. During inflationary period, fixed amounts of money buy less quantity of goods and services. The real value of money is drastically reduced i.e the purchasing power of consumers are reduced.
The Impact of rapid inflation growth has led the federal government of Nigeria to adopt several sexual measures of inflation control. Paramount among these measures are monetary and credit policies formulated restore balance of payment to a health; position price and way policies formulated to check the growth of price and income.
Inflation growth became more intensified since later eighty’s, inflation rate was 9.9 percent in 1980, in 1981 it rise to 21.0 percent and 7.6 percent, in 1982. In 1988 it increased to 56.1 percent, and 1989, it was at 42.6 percent in 1992; 57.2 percent in 1993; 55.3 in 2000; it reduced to 27.2 percent and 18.9 percent in 2001 (CBN Bulletin, 2003).
The researcher feels that the Nigerian economy is under surge until adequate measures are adopted to arrest the Impact of inflation on the economy:
Having a view on the Impact of inflation on Nigeria economy and realizing that the problems caused by the Impacts of inflationary growth is becoming unbearable to the citizens and the entire economy, of becomes necessary to critically analyzed the impact of inflation on Nigerian economic growth (1980-2006).
1.2 STATEMENT OF THE PROBLEMS
Inflation growth has been the macroeconomic problem in Nigeria that seems to be intractable over the years, Nigeria government has adopted various measures (both monetary and fiscal policies) to curb or reduce inflation growth to an acceptable level but all these policies seem to have no effects. This gave rise to the following research question:
v Why have all the policies used unable to reduce inflation rate to an acceptable level?
v What is the Impact of inflation on Nigerian economic growth?
These are the research questions that will guild me in this study.
1.3 OBJECTIVES OF THE STUDY
The study is aimed at achieving the following objectives:
1. To determine the Impact of inflation on Nigerian economic growth.
2. To identify how money supply affects Nigerian economy
3. To recommend to the monetary authorities and the government on how inflation should be reduced an acceptable level
1.4 RESEARCH HYPOTHESIS
To carryout the study effectively, the following hypothesis have been formulated as a guild:
Ho: inflation has no significant Impact on Nigeria economy growth.
H1: inflation has significant Impact on Nigeria economic growth.
Ho: interest rate has no significant Impact on Nigeria economy growth.
H1: interest rate has significant Impact on Nigeria economy growth.
1.5 SIGNIFICANCE OF THE STUDY
The importance of these study are so numerous to mention. It will be useful to policy makers especially in formulating policy that will reduce inflation growth rate. It will be useful to monetary houses like central and commercial banks.
It will also be of importance to students of economics and other related fields. It will be useful to the general public.
1.6 SCOPE/LIMITATIONS OF THE STUDY
To get real picture of the Impacts of inflation on an economy, the study will cover the whole Nigeria economy between 1980 and 2006.
1.7 LIMITATION OF THE STUDY
This study suffered some limitations. The limitation are:
1. Dearth of data and other related materials.
2. Time do for the completion of this study posses a constraint to the study.
3. There is also inadequate finance to run the study.
Measuring real economic growth of a country aims to assess whether growth can cope with the growing demands of the society including the population and prosperity growth rates; and how to maintain and confine the depletion rate of its national natural resources.
This study is designed to investigate the effect of the basic economic factors such as interest rate, inflation rate, and GDP onNigeria 's real economic growth by answering the following questions: 1 -Is the effect of inflation on real economic growth rate significant?
2- Is the effect of interest rate on real economic growth rate significant?
3- Is the effect of R.GDP on real economic growth rate significant?
Ho-1: There is no significant effect of interest rate on economic growth. Ho-2: There is no significant effect of inflation on economic growth. Ho-3: There is no significant effect of GDP on economic growth.
- Is there a relationship between the inflation and interest rate on economic growth of Nigeria?
- Does high level of inflation and interest rate causes Nigeria Economic failure?
- Does accumulation of interest rate and mismanagement of economy causes inflation in a Country
- Is regulation and supervision of interest and inflation rate an effective tool in Nigeria Economic Growth
- Does sound credit analysis reduce the incidence of inflation and interest rate? Can poor analysis of country financial data lead to interest and inflation rate
- Can high level of bad debt result into inflation rate?
- HO: there is no relationship between the inflation and interest rate on economic growth of Nigeria.
H1: there Is a relationship between the inflation and interest rate on economic growth of Nigeria.
- HO: high level of inflation and interest rate does not cause Nigeria Economic failure.
H1: high level of inflation and interest rate cause Nigeria Economic failure.