Inflation-Economic Growth Nexus in Nigeria: New Evidence on Threshold Effects

Abstract

Purpose: The aim of this study is to analyze the influence of inflation on the economic growth of Nigeria from 1990 to 2021. Specifically, it aims to identify a threshold, if it exists, at which the impact of inflation on economic growth begins to shift.

Methodology: To assess the inflation threshold and its impact on economic growth, this study employed a novel method, the endogenous sample-splitting and threshold model developed by Hansen (2000).

Findings: The study reveals a non-linear relationship between inflation and economic growth in Nigeria, with a single inflation threshold of 12.88%. When inflation is below this threshold, it positively impacts economic growth, while exceeding it negatively impacts economic growth. Furthermore, higher trade openness negatively affects economic growth, and population growth positively impacts growth across all inflation regimes. Investments contribute to economic growth in the linear model, but their influence is statistically insignificant across the threshold regimes. Financial deepening impedes growth above the inflation threshold.

Unique Contribution to Theory, Practice and Policy: The study expands upon the current body of research on estimating the inflation threshold for Nigeria using the Hansen (2000) sample splitting technique. To our knowledge, this is the first study that has adopted this technique to estimate inflation threshold for Nigeria. The Hansen (2000) threshold technique offers more flexibility in model specification. It allows for the estimation of parameters separately for different regimes, typically above and below the threshold. This flexibility can help in identifying distinct regimes, such as low and high inflation regimes, and capturing their unique characteristics. The research findings are crucial for shaping monetary policy in Nigeria, providing policymakers with valuable insights for establishing an inflation target that is in line with Nigeria's overarching goal of attaining sustained economic growth.