The Effect of Inflation and Interest Rate on Economic Growth of Nigeria

The Effect of Inflation and Interest Rate on Economic Growth of Nigeria (A Case Study of First Bank)

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgement

Abstract

Table of content

CHAPTER ONE

• INTRODUCTION of “the effect of inflation and interest rate on economic growth”
• Statement of problems
• Objective of study
• Research question
• Statement of hypothesis
• Significance of study
• Scope & limitation
• Definition of terms
• Reference

CHAPTER TWO

• LITERATURE REVIEW of “the effect of inflation and interest rate on economic growth”

2.1      interest rate management in Nigeria

• Factors that influence the interest rate
• Management prior 2003/ monetary development
• The case for interest ceiling
• The case against interest ceiling
• Inflation and unemployment
• Inflation and economic growth
• Effect of inflation on savings/ growth
• Inflation and growth in developing nation

2.2.1 Empirical study on the relationship on inflation

And economic growth in Latin America other countries

• Empirical evidence based on some African countries

CHAPTER THREE

• RESEARCH DESIGN AND METHODOLOGY of “the effect of inflation and interest rate on economic growth”

3.1      Research design

• Research methodology
• Area of study
• Location of data
• Instrument of data collection
• Method of data presentation
• Techniques of data analysis

CHAPTER FOUR

• PRESENTATION, ANALYSIS AND INTERPRETATION of “the effect of inflation and interest rate on economic growth”

4.1      Presentation of data

• Analysis of result
• Test of hypothesis

Chapter five

• SUMMARY, RECOMMENDATION AND CONCLUSION

5.1      Summary of findings

• Recommendation
• Conclusion

Bibliography

ABSTRACT

The main objective of this study is to investigate the effect of inflation and interest rate on the economic growth of Nigeria. Unit root test (Augmented Dickey-Fuller test) has been exploited to check the integration order of the variables. A cointegration analysis with four variables (c growth, interest rate, GDP, and inflation level) is employed. The study adopted the Johansen test. Findings indicated that both trace test and max eigenvalue static showed that the four equations have significant existence 1% or 5%. It means that all variables have a long term equilibrium relationship. The study adopted the same four variables to discuss the Granger Causality relationship; findings indicated that inflation causes interest rates. On the other hand, all other variables are independent of each other. Regression was conducted to test growth rate with an interest rate which showed that the current interest rate has an influencing power on growth rate. Also, regression was used to test growth rate with inflation rate; it showed that inflation rate has influence power on growth rate. Finally, regression was used to test GDP, interest rate, and inflation rate together; results have shown that current GDP and one lag GDP have influence power to the growth rate.

Keywords: Inflation, Economic Growth, Interest Rate, GDP JEL Classification: E31, 040, E43, E01

CHAPTER ONE

INTRODUCTION

The economic growth of any country reflects its capacity to increase the 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; its up and down volatility is closely related to inflation rates. Its high or low rates also impact the economic boom (high GDP) and extending to influence the 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 to Nigeria’s economy; it will examine the effect of interest rate, inflation, and Real GDP on the real growth rate of Nigeria’s economy. The 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 price 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 too difficult for the government to solve. During an 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 to restore the balance of payment to health; position price and way policies formulated to check the growth of price and income.

Inflation growth became more intensified since later eighty’s, the inflation rate was 9.9 per cent in 1980, in 1981 it rose to 21.0 per cent and 7.6 per cent, in 1982. In 1988 it increased to 56.1 per cent, and in 1989, it was at 42.6 per cent in 1992; 57.2 per cent in 1993; 55.3 in 2000; it reduced to 27.2 per cent and 18.9 per cent 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 are becoming unbearable to the citizens and the entire economy, of becomes necessary to critically analyzed the impact of inflation on the 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 the 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 the Nigerian economy
3. To recommend to the monetary authorities and the government on how inflation should be reduced to an acceptable level

1.4 RESEARCH HYPOTHESIS

To carry out the study effectively, the following hypothesis has been formulated as a guild:

Hypothesis I

Ho: inflation has no significant impact on Nigeria economic growth.

H1: inflation has a significant impact on Nigeria economic growth.

 Hypothesis II

Ho: interest rate has no significant impact on Nigeria economic growth.

H1: interest rate has a significant impact on Nigeria economic growth.

1.5 SIGNIFICANCE OF THE STUDY

The importance of these studies is so numerous to mention. It will be useful to policymakers especially in formulating policy that will reduce the 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 the 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 is:

1. The dearth of data and other related materials.
2. Time does for the completion of this study poses a constraint to the study.
3. There is also inadequate finance to run the study.

1.8 RESEARCH PROBLEM

Measuring the 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 on Nigeria’s real economic growth by answering the following questions:

1 -Is the effect of inflation on the 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?

Test Hypotheses

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.

1.9 RESEARCH QUESTIONS

1. Is there a relationship between inflation and interest rate on the economic growth of Nigeria?
2. Does a high level of inflation and interest rate cause Nigeria Economic failure?
3. Does accumulation of interest rate and mismanagement of economy cause inflation in a Country?
4. Is regulation and supervision of interest and inflation rate an effective tool in Nigeria Economic Growth
5. 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
6. Can a high level of bad debt result in an inflation rate?

1.10 RESEARCH HYPOTHESIS

1. HO: there is no relationship between inflation and interest rate on the economic growth of Nigeria.

H1: there Is a relationship between inflation and interest rate on the economic growth of Nigeria.

2. 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.