CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The price variations in goods and services over time are reflected in inflation, a key economic

indicator. For of its considerable economic impact and the uncertainty it causes, authorities

everywhere are prioritizing tight control over inflation (Omotosho 2023). Inflation is a popular

topic of discussion among central banks, governments, economists, and other stakeholders.

Policy choices in Nigeria have been greatly impacted by the direction of inflation rates,

especially in this year 2024. The majority of economists and monetary policymakers favor a low

and steady inflation rate because it enables quicker labor market changes during downturns and

lowers the cost of borrowing for manufacturers, which increases profitability (Banerjee 2013). In

turn, this increases investments, lowers unemployment, and raises economic production.

In order to combat the threat of inflation, the Monetary Policy Committee (MPC) of the Central

Bank of Nigeria adopted a contractionary posture on monetary policy instruments for 28 months

(September 2023–January 2024) (Omotosho 2024). Controlling inflation and preserving a stable

exchange rate environment are the MPC's top priorities. Many experts and stakeholders are

currently calling for the MPC to relax its position on growth promotion. The MPC meeting and

the monthly inflation numbers are announced one month apart, which makes it difficult for

policymakers to properly coordinate their approaches. Statistical predictions and estimations can

help decision-makers formulate their strategy in these circumstances (Grier et al. 2018).

Nigeria's monetary policy has been focused on ensuring price and exchange rate stability over

the previous three decades. Since 1970, the nation has had a mixed record with inflation. Oil

1
export revenues significantly increased as a result of the oil boom in the 1970s, and the

government spent a lot more money on post-war development and rehabilitation (Tsyplakov

2010). Massive oil earnings, which started dominating the economy in 1973, provided the fuel

for this. The monetization of oil revenues caused the domestic money supply to expand quickly,

which put upward pressure on the overall price level and created inflationary pressures (Okun,

2017).

Nigeria experienced internal and foreign unrest in the early 1980s as a result of declining oil

prices on the international market. The government implemented a structural adjustment program

(SAP) in 1986 to address the severe budget deficits brought on by the economic crisis (Ball

1992).

The devaluation of the national currency, rapid expansion of the money supply, sluggish

development in the industrial and agricultural sectors, and an excessive dependence on imports

all contributed to inflationary pressures throughout the SAP era (Emery 2016). Nigeria's actual

GDP growth remained low from 2002 to 2009, and early 2000s inflation was unusually high

before sharply declining in the late 2000s. In order to maintain the low inflation rate of Nigeria,

this work on simulating the inflation process there becomes important.

Having established the aforementioned, In statistics, "volatility" refers to the variance of a series,

which measures how much a random variable deviates from its mean. According to Omotosho

(2023) and Emery (2016), inflation volatility in this sense refers to swings or instability in a

particular inflation series that expresses the severity of unanticipated changes and unforeseen

components of inflation resulting from external shocks. The difficulty of 3 predicting future

values of a variable, which symbolizes the unpredictable nature of future occurrences, gives birth

to uncertainty (Ball, 2020). Therefore, the unpredictability or uncertainty in predicting the level

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of prices in the future is referred to as inflation uncertainty. According to Hentschelte (1995),

high uncertainty is indicative of the variable's predicted value being more volatile or having

bigger variations around a certain mean. Although it is difficult to directly affect inflation's

volatility as an economic indicator, efforts may be done to lessen the uncertainty that goes along

with it. Due to many political circumstances and components, achieving and sustaining stable

inflation can still be difficult, making the unpredictability of inflation essential. In order to create

successful preventative strategies, it is therefore essential to measure inflation uncertainty

(Hentschel, 2018).

Inflation uncertainty has been measured using a variety of ways over time, moving from more

conventional methods like standard deviation or variance to more cutting-edge ones like type

volatility prediction models (Natalia, 2018). Since GARCH models allow for stochastic variation

of the variance over time, they are increasingly popular for modeling economic time series, such

as consumer price indices. The Application of th GARCH Model" holds significant promise in

understanding and managing Nigeria's current inflationary period. By utilizing the GARCH

model, the research aims to capture time-varying volatility and dynamics of inflation, providing

valuable insights for policymakers, economists, and financial analysts.

The time-varying volatility of inflation may have been neglected in the prior work on inflation

dynamics in Nigeria, which would have limited its accuracy (Hentschel, 2017). It's possible that

conventional econometric models don't accurately capture the intricacies of Nigeria's inflation

behavior under erratic conditions. Insufficient consideration of time-varying volatility in

Nigerian inflation models (Hentschel, 1995; Pagan, 1996; Brooks, 2008; Omotosho, 2013; Grier,

1998; Ball, 1992) is the highlighted gap in the research. This study 4

3
greatly contributes by giving a thorough knowledge of inflation behavior under various

economic situations and improving inflation forecasts by utilizing the GARCH model, which is

intended to manage shifting variances over time. Additionally, the analysis can reveal the

fundamental causes of Nigeria's inflation volatility, which is important for formulating focused

policy responses. Beyond Nigeria, other emerging countries experiencing comparable

inflationary issues may benefit from its expertise.

The research makes accurate forecasts for the 12-month data using statistics on the headline,

core, and food inflation rates from January 1995 to December 2023. According to the current

inflationary shocks, failing to take into account asymmetric factors when modeling inflation

volatility may cause volatility levels to be either over- or under-predicted (Natalia, 2010).

Furthermore, while high-frequency data increases the effectiveness of obtaining model-based

estimates of volatility from economic time series, utilizing low-frequency data in earlier research

may have drawbacks.

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. Indeed, the monetary policy

framework adopted by Nigeria since 1993 has an overriding objective and that is the

achievement of single digit inflation (Essien and Eziocha 2022). Monetary and fiscal polices 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 inspite of these efforts; the achievement of price stability objective has been limited.

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Inflation undermines the role of money as a store of value. It also, frustrates investments and

growth. Empirical studies (Ajayi and Ojo, 2018; Fisher 2023), on inflation, growth and

productivity confirm the long-term inverse relationship between inflation and growth. 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. Consequently, some

economic analysts (Adeyeye and Fakiyesi 2019, Osakwe 2023 and Asogu 2019), in recent time

have sought explanation for this worrisome trend that has evidently been impeding economic

growth in the country.

Against this background, the research intend to extend focus the effect of inflation on Nigeria

economy growth with a view to proffering suggestion on ways for its control.

1.3 Research Questions

The following research questions of this study is:

i. What is the impact of inflation on economic growth?

1.4 Research Objectives

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The main objective of the research is to determine the effect of inflation on Nigeria economic

growth. While the specific objective is:

i. To examine the impact of inflation on economic growth

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1.5 Research Hypothesis

The hypothesis for this study is as follow:

i. There is no significance impact of inflation on economic growth.

1.6 Scope of the study

The scope of this study i.e Inflation on Nigeria Economy Growth; Evaluating the impact,

solutions and predict the future on inflation. This study used Ado-Ekiti geographical area, using

some selected local government in the state.

Definition of terms

Inflation: is the rate of increase in prices over a given period of time

Economy: the state of a country or region in terms of the production and consumption of goods

and services and the supply of money.

Economy growth: Economic growth is an increase in the production of goods and services in an

economy. Increases in capital goods, labor force, technology, and human capital.

Gross domestic product (GDP): is the total monetary or market value of all the finished goods

and services produced within a country’s borders in a specific time period.

Unemployment: Unemployment can be defined as the difference between the amount of labour

at current wage rate and working conditions and the amount of labour not hired at these levels

(Briggs, 2023). However, Gbosi (2021) defined unemployment as a situation in which people

who are willing to work at the prevailing wage rate are unable to find jobs.

Poverty: is the state of being inferior in quality or insufficient in amount.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Conceptual Review

2.1 Inflation

It is the persistent increase in the general price level within the economy which affects the value

of the domestic currency (Fatukasi, 2012). It is not once and for all upward price movement but

has to be sustained over time and affect all goods and services within the economy. There are

several factors that are responsible for inflation in Nigeria. The inflation which results

fromexcess aggregate demand is called the demand fall inflation, the cost push inflation results

from upward movement in the cost of production while the structure inflation arises from some

constraints such as inefficient production, marketing and distribution systems in the productive

sectors of the economy (Fatukasi, 2022).

Other forms of inflation in developing country could be imported, open and seasonal inflation.

The imported inflation comes as a result of transmission of inflation through internationally

traded goods and services. This is when the economy imports goods from countries already,

experiencing inflation. The open inflation comes as a result of uninterrupted market mechanisms

and seasonal inflation is associated off season in production when supply constraints permeates

the economy as a result of fall in production especially farming produce. In Nigeria other factors

can be attributed to inflation such the nature of the economy, its history and fiscal and monetary

policy direction.

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2.1.1 Types of Inflation

A. On the basis of Rate: Inflation has been categorized into following types on the basis of its

different rates: 9

1. Creeping Inflation: Creeping Inflation also known as a Mild Inflation or Low Inflation refers

to that type of inflation when the rise in prices is very slow like that of snail or creeper. It is the

mildest form of inflation with less than 3% per annum.

2. Chronic Inflation: If creeping inflation persist for a longer period of time then it is often called

as Chronic or Secular Inflation. It is called chronic because if an inflation rate continues to grow

for a longer period without any downturn which may possibly lead to Hyperinflation.

3. Walking or Trotting Inflation: When prices rise moderately with a single digit of less more

than 3% but less than 10% per annum it is called as Walking Inflation.

4. Running Inflation: A rapid acceleration in the rate of rising prices is referred as Running

Inflation. This type of inflation occurs when prices rise by more than 10% per annum.

5. Galloping Inflation: Galloping inflation also known as Jumping inflation occurs when prices

rise by double or triple digit inflation rates of more than 20% but less than 1000% per annum.

6. Hyperinflation: when prices rise at an alarming high rate with quadruple or four digit inflation

rate of above 1000% per annum then is termed as Hyperinflation. It is a situation where the

prices rise so fast that it becomes very difficult to measure its magnitude. During a worst case

scenario of hyperinflation, value of national currency of an affected country reduces almost to

zero. Paper money becomes worthless and people start trading either in gold and silver or

sometimes even use the old barter system of commerce. Two worst examples of hyperinflation

9
recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe

during 2004-2009 under Robert Mugabe's regime.

B. On the basis of Causes: Inflation has been categorized into following types on the basis of its

different causes:

1. Demand-Pull Inflation: Demand-Pull Inflation also known as Excess Demand Inflation takes

place when aggregate demand for a good or service outstrips aggregate supply. In other words,

when aggregate demand for all purposes- consumption, investment and government expenditure-

exceeds the supply of goods at current prices then it is called Demand-Pull Inflation. Demand-

Pull inflation gives rise to a situation often economists describe as “Too much money chasing too

few goods”.

2. Cost-Push Inflation: When prices rise due to growing cost of production of goods and services

then it is known as Cost-Push Inflation. Cost-push inflation also came to known as “New

Inflation” is determined by supply-side factors mainly caused by higher wage-push, Profit-Push

and higher costs of raw materials.

3. Scarcity Inflation: Scarcity inflation occurs due to hoarding by unscrupulous traders and black

marketers so as to create an artificial shortage of essential goods like food grains, kerosene,etc.

with an intension to sell them only at higher prices to make huge profits.

4. Structural Inflation: Structural inflation is that type of inflation often experienced in

developing countries which is caused by structural rigidities such as agricultural bottlenecks,

resource constraints bottlenecks, foreign exchange bottlenecks, physical infrastructural

bottlenecks etc.

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C. On the basis of Coverage: Inflation has been categorized into following types on the basis of

its coverage:

1. Comprehensive Inflation: When the prices of all commodities rise throughout the economy it

is known as Comprehensive Inflation also known Economy Wide Inflation.

2. Sporadic Inflation: When prices of only few commodities in few regions rise, it is known as

Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad monsoon

represents this type of inflation.

D. On the basis of Occurrence: Inflation has been categorized into following types on the basis

of its time of occurrence:

1. War-Time Inflation: when inflation that takes place during the period of a war-like situation

then it is known as War-Time inflation. During a war, scare productive resources are all diverted

and prioritized to produce military goods and equipments resulting in extreme shortage of

resources use producing essential commodities. Consequently, prices of essential goods keep on

rising in the market resulting in War-Time Inflation.

2. Post-War Inflation: Inflation that takes place soon after a war is known as Post-War Inflation.

After the war, government controls are relaxed, resulting in a faster hike in prices than what

experienced during the war.

3. Peace-Time Inflation: When prices rise during a normal period of peace then it is known as

Peace-Time Inflation. It is due to huge government expenditure or spending on capital projects of

a long gestation period.

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E. On the basis of Government Reaction: Inflation has been categorized into following types on

the basis of Government's degree of reaction:

1. Open Inflation: When government does not attempt to restrict inflation, it is known as Open

Inflation. In a free market economy, where prices are allowed to take its own course, open

inflation occurs.

2. Suppressed Inflation: When government prevents price rise through price controls, rationing,

etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation. However,

when government controls are removed, Suppressed inflation becomes Open Inflation.

Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.

2.1.2 Economic growth

According to Dwivedi (2004), economic growth on the other hand is a sustained increase in per

capita national output or net national product over a long period of time.

It implies that the rate on increase in total output must be greater than the rate of population

growth. Another quantification of economic growth is that national output should be composed

of such goods and services which satisfy the maximum want of the maximum number of people.

Economic growth is the quantitative increase in the monetary value of goods and services

produced in an economy within a given year. Economic growth is measured as a percentage

change in the Gross Domestic Product or Gross National Product (Dwivedi, 2004).

Other concepts are: exchange rate; which is the value of country’s currency when compare with

the US dollar. Interest rate, which is the cost of obtaining loanable fund.

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Inputs of labour; which are the effort of labour in the production process and input of capital

refers to the contribution of the various machines and equipment used in production process as

well.

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2.1.3 The trend between inflation and economic growth in Nigeria

The facts and figures obtained from the IMF World Economic Outlook Report (2011) revealed

that the Nigeria’s GDP tends to be low when the inflation rates are high apart from a few years of

the 80’s. For example, in 1998 GDP growth rate was relatively high amidst the 13

high inflationary levels at the time. This could be positive effect of increased domestic

productivities which was the major thrust of SAP in the sense that domestic output increased.

In 1986, the rate of inflation in Nigeria was 6.25 with the GDP growth rate of 8.754; in 1987 the

rate of inflation rose to 11.765 percent with GDP growth rate decreasing to -10.752. The inflation

rate rose sharply to 34.211 and 49.2 respectively in 1988 and 1989 with the GDP growth rate of

7.543 and 6.467 within these years. In 1990, the rate of inflation was stabilized to 7.895 with the

GDP growth rate higher than the rates experienced since the introduction of SAP in 1986.

The rate of inflation continued to Skyrocket above double digit nearing triple digits in some of

years where it was above 50 percent in period between 1993 and 1995.

This was reflected in abysmal level of the Nigeria’s GDP growth rate within the period. The rate

of inflation rose from 12.195 percent in 1991 to 44.565 in 1992, 57.416 in 1993, 72.721 in 1994

and 72.81 in 1995 with the corresponding value of the GDP growth rate of -0.618, 0.434, 2.09,

0.91, and 0.307 within those years.

In 1996, the rate of inflation reduced drastically to 29 percent though not healthy for meaningful

investment and further reduced to 10.673 in 1997, 7.862 in 1998, and 6.618 in 1999 and remains

relatively stable at 6.938 in year 2000. Within this period the value of GDP growth rate was

4.994 in 1996, 2.802 in 1997, 2.716 in 1998, and 0.474 in 1999 and gained slightly to 5.318 in

year 2000.

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The trend of inflation between 2001 and 2010 in Nigeria at average level is in the double digit

rate but the GDP growth seems unimpressive which could be attributed to petroleum export

proceeds. The inflation rate was 18.869 in 2001, 12.883 in 2002, 14.037 in 2003, 15.001 in 2004,

17.856 in 2005, 8.218 in 2006, 5.413 in 2007, 11.581 in 2008, 12.543 in 2009 and 13.72 in 2010

with the corresponding GDP growth rates within these years as 8.164, 21.172, 10.335, 10.585,

5.393, 6.211, 6.972, 5.984, 6.96, and 8.724, respectively.

Despite the relatively good annual GDP growth rate, the poverty level and unemployment keep

growing. The level of investment does not match with the growth level because the inflation

constitutes risk. It therefore shows that the level of inflation in Nigeria is disinvestment and not

likely to translate to sustainable development in the long run.

2.2 Theoretical Review

Several school of thoughts have tended to associate inflation with factors they consider to affect

supply and demand which creates lags that manifest in higher prices of goods and services in an

economy for a sustainable period of time. Some the main theories of inflation reviewed in this

work are quantity theory of money, Keynesian theory, monetarist theory structural theory of

inflation, rational expectations, revolutionary theory, new classical synthesis and new political

macroeconomics of inflation The quantity theory of money: According to Totonchi (2021), the

quantity theory of money is the oldest surviving economic doctrine which associated the general

level of prices to changes in quantity of money in circulation. This means that the level of money

supply determines the inflationary or non-inflationary level of an economy. The classicalists and

some neo-classicalists viewed the analysis of inflation on this theory. Those who contributed to

this theory include David Hume (1711 - 1776), David Ricardo (1772 - 1823) and Irvin Fisher

(1876 - 1947).

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David Hume provided the first dynamic process of how the impact of monetary changes spread

from one sector of the economy to another and in the process changing relative prices and

quantities. David Ricardo postulates that inflation in Britain was as a result of Bank of England

irresponsibility over the issue of money and discouraged the idea on the possibility of output and

employment increases that could result from the injection of money in the economy. Fisher

brought out the famous equation of exchange (MV = PT). Fisher and Author Cecil Pigeon (1877

- 1959) and the neoclassical economists of the Cambridge school demonstrated that monetary

control could be achieved in a fractional reserve banking regime through control of exogenously

determined stock of high powered money.

Monetary theory of inflation: Monetarism refers to the followers of Milton Friedman (1867 –

1960) who hold that only money matters and as such monetary instruments are more potent

instruments of price and economic stabilization than fiscal policy. This school is known as

modern quantity theory of money which holds that inflation is always and everywhere a

monetary phenomenon which comes from rapid expansion in quantity of money than the

expansion in the quantity of output. That is, if money supply rises faster than the rate of growth

of national income then there will be inflation.

According to Totonchi (2011), monetarists employed the familiar identity of exchange equation

of Fisher. That is Quantity theory of Money (Fisher version).

MV = PT

Where: M = money supply; V = velocity of circulation;

P = price level; T = transactions.

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T is believed to measure output and as such is often substituted for Y (national income). The

above equation must hold (MV = PY), that is, the rate of expenditure must equal the value of

output. However, they argue that it is unwarranted increases in the money supply that manifest in

inflation.

Keynesian theory of inflation: John Maynard Keynes (1883 – 1946) and his followers were of

the view that increase in the aggregate demand is the source of demand pull inflation. Demand

pull inflation is where the total demand for goods and services is in excess of the aggregate

supply and provisions of goods and services in the economy. The aggregate demand in this sense

comprises of consumption, investment and government expenditure. According to Totonchi

(2011), policy that causes the decrease in each component of total demand is effective in

reduction of pressure on demand and invariably inflation. This is basically involves reduction in

government expenditures, increase in tax as well as controlling the volume of money.

In Nigeria, where the economy can hardly produce output to meet up with economy’s demand

and which is highly foreign dependent, may be faced with more inflationary pressures due to

excess demand and when taxes are increased as the producers may get involved more in rent

seeking economic activities rather getting involved in the real sectors of the economy which can

tackle the problem of low productivity and unemployment.

Cost push theory of inflation: This type of inflation became more prominent in the 50’s and

70’s when it became known as “New inflation”. This is taken to be associated with increase in

the cost of production which results from wage increases or increases in the input prices.

According to Totonchi (2011), when the labour unions demand for more wages from the

employers and if granted, the employers in turn will increase the cost of their products which

will ultimately result in cost push inflation. He added that the resultant price increase may affect

17
some other companies that use the products whose prices have risen and thereby pushing up their

prices. This spiral may be on the national scale and may be sustained over time.

The developing countries especially Nigeria is confronted with deficient input resources

especially capital goods and has to resort to importation of such goods from developed countries.

This has the tendencies of extra cost of importation which in the long run often make the

domestically produced goods to be costly compared to similar finished goods imported to the

country and hence has the negative impact of undermining the domestic production and lead

ultimately sustained higher prices.

Structural inflation theory: This theory considers economic structural factors to be associated

with more demand or less demand, supply increase or decrease.

According to Totonchi (2019), structural improvement brings about rapid economic growth and

when the less developed countries fail to change their deep seated undeveloped structure, they

will definitely find themselves in the inflationary situation. He equally attributes structural

inflation as emphasized by structuralism to growth in the service sector being brought about by

population growth and immigration. This theory is related to the case of Nigeria as the

population of the country is constantly growing, the economic and social structure remains

unchanged. This can explain the difficulty in tackling the wave of inflation in the country.

Fashoyin (1986) in Fatukasi (2012) with respect to the impact of structural phenomenon on

inflation in Nigeria identified ten structural variables such as agricultural bottlenecks, industrial

production, imports, exports, food import and production, trade union militancy, indirect taxation

on companies, wage bill, government expenditure in the form of deficits financing and money

supply to be responsible for inflation in Nigeria for the period between 1970 and 1980.

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Countries with structural problem especially less developed countries according to Totonchi

(2011), common anti-inflation measure such as contractionary monetary policy are in many cases

contradiction as such policies prescriptions end up stagnating the economic growth of the less

developed economies. This is fundamentally true because less developed countries have several

deficiencies that have to be addressed such as infrastructures and social services, attempt to

reduce spending and liquidity in the system may result in poor level of economic growth.

2.2.1 Rational expectations theory

The macroeconomic revolution of 1970’s was dominated by the idea of Rational Expectations

such as Lucas (1972), McCallum (1987), Sargent and Hasen (1980). Their major assumption is

that the economic agents form their macroeconomic expectations rationally based on all current,

and past relevant information available and not only on past information as in the case of

backward-looking or adaptive price expectations. They viewed that if the monetary authority

announces a monetary stimulus in advance, people expect that prices would rise. This according

to them will make the forward looking rational expectation adjustments of economic agents will

ensure that the policy prescription or pronouncement of the monetary authority fails. Conversely

according to the theory, if a policymaker announces anti-inflationary policy in advance, the

policy would not achieve its desired goal if people do not believe that the government will really

carry it out.

New neoclassical synthesis of inflation: The new neoclassical synthesis according to Totonchi

(2011) viewed that monetary and demand factors are key determinants of business cycles. He

added that the synthesis views expectations as critical to the inflation process but that expectation

can be managed by the monetary policy rule. The new IS-LM-PC (PC = Phillips curve) version

of the new neoclassical synthesis makes the price level endogenous variable and the model

19
allows the Keynesian and real business cycle mechanism to operate through somewhat different

channels (Totonchi, 2011).

Neo political macro-economics of inflation: The other theories of inflation focus mainly on

economic factors as the determinants of inflation and more other factors such as institutions,

political process and culture in process of inflation affect economic policy in the real world. The

new political economy provides fresh perspectives on the relations between timing of 19

elections, performance of policymakers, political instability, policy credibility and reputation and

the inflation process itself (Totochi, 2011).

It considered that the sustained government deficits as a potential cause of inflation may be

partially or fully domesticated when the political process is considered as well as possible

lobbying activities on government budgets.Relating inflation to the theories of growth

2.2.2 Keynesian Theory

The traditional Keynesian model illustrates growth and inflationary relationship through the

aggregate demand and the aggregate supply curves. The model is such that if the aggregate

supply curve is vertical, changes on the demand side of the economy affect prices only if the

aggregate supply curve is upwardly sloped changes in aggregate demand will affect both prices

and output. In Gokal and Hamif (2004), moving from short run to hypothetical long run factors

that drive inflation rate and output in the short run such as expectation, labour force, price of

other factors of production, fiscal or monetary policy are assumed to balance out in the steady

state. This is because the dynamic adjustment of short run aggregate demand and aggregate

supply curves yields an adjustment path which exhibits an initial positive relationship between

inflation and growth which turns negative towards the higher part of the adjustment.

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Monetarism: The monetarism emphasized several long run properties of the economy such as the

quantity theory of money and the availability of money. The proponent is Milton Friedman.

According to Gokal and Hamif (2019), the quantity theory of money linked inflation to

economic growth by equating the total amount of spending in the economy to the total amount of

money in circulation. Friedman looked at inflation being a product of an increase in the money

supply and velocity of money at a rate greater than the rate of growth in the economy.

Monetarism suggests that in the long run, prices are mainly affected by the growth rate in money

while having no real effect in money but if the growth in the money supply is higher than the

economic growth or output rate, it will manifest in inflation.

Neo-classical theory: The earliest model of the Neo classical theory was formulated by Solow

(1956) and Swan (1956) which exhibits diminishing returns to labour and capital separately and

constant returns to both factors jointly. Technological change replaced investment as pricing

factors explaining long term growth and its level was assumed by Solow and other growth

theories to be determined exogenously (independently) of otherfactors including inflation. Tobin

(2025) developed Mundell’s model as modification of Solow’s and Swan’s of 1956 in making

money a store of value in the economy. Tobin suggests that inflation causes individuals to

substitute out of money and into interest earning assets which leads to greater capital intensity

and promotes economic growth. That is inflation exhibits a positive relationship with economic

growth. The Neo-Keynesian: It initially emerged from the ideas of Neo-Keynesian and came out

with a major development about the concept of potential output which in some cases referred to

as natural output. This is a level of output where the economy is at its optimal level of

production, given the institutional and natural constraints. This level of output corresponds to

natural rate of unemployment. According to the theory, inflation depends on the natural rate of

21
unemployment. The theory postulate that if the GDP falls below its potential level and

unemployment is above the natural rate of unemployment, holding other factors constant,

inflation J. Econ. Int. Bus. Manage. / Femi and Emmanuel 25 will decelerate suppliers to fill

excess capacity, reducing prices and undermining built-in inflation, leading to disinflation. If the

GDP is equal to its potential and unemployment rate is equal to non-accelerating inflation rate of

unemployment, then inflation rate will not change as long as there are no supply shocks.

2.3 Empirical review

The study on the relationship between economic growth and inflation has attracted several

scholars to empirically establish the relationship between inflation and economic growth both in

the developed and developing countries.

Some of the many findings on the study will be reviewed here.

Malla (2020) conducted an empirical research on some Asian countries that belong to the

organization for economic cooperation and development (OECD) with the results indicating

negative statistically significant relationship between economic growth and inflation. This is in

line with the work of Barro (2017) that tried to establish the relationship between inflation and

economic growth for a sample of more than 100 countries between 1960 and 1990 which

indicated that statistically significant negative relationships exists between inflation and

economic growth in all the countries. Barro (2019) found out that an average increase of inflation

by 10 percentage points in a year result in reduced growth rate of real perception GDP by 0.2 to

0.3 percentage points per year on the average and came to the conclusion that some reasons exist

to suggest that higher inflation on the long term reduces economic growth. This is further

supported by the work of Sarel (2022) who maintained that inflation in most countries were

22
modest before the 1970s and became higher afterwards. He disaggregated his findings into two

periods of before 1970 and after 1970 and said that the results on relationship between inflation

and economic growth exhibited positive results before 1970 while the reverse is the case after

1970s.

In Bruno and Easterly (2018), they established an inconclusive relationship between inflation

and economic growth after considering that inflation rate of 40 percent and above as threshold

level for inflation crises. Beyond the threshold, they established a negative relationship between

inflation and economic growth. After examining the empirical relationship for the period

between 1961 and 1992 they found out that countries recover after successful reduction of high

inflation and there is no permanent damage to economic growth due to discrete high inflation

crises. This conclusion does not hold for Tanzania as evidenced in the work of Shitundu and

Luvanda (2000) that used Least Trimmed Squares (LTS) which generated empirical results that

suggest that inflation has been harmful to economic growth in Tanzania.

On the other hand, Faria and Carneiro (2001) investigated the relationship between inflation and

economic growth for Brazil for the period between 1980 and 1995 with the result establishing a

negative relationship in the short run but that inflation does not affect economic growth in the

long run. This could be a situation where the scope of production can change to absorb the lag of

excess demand. Omoke (2010) viewed the findings of Faira and Carneiro to support the

neutrality concept of money and that inflation affects economic growth in the long run as

established by some other researchers.

Sweidan (2004) examined the possibility of the relationship between inflation and economic

growth having a structural breakpoint effects for Jordanian economy covering the period of 1970

and 2003. He found out a positive and significant relation of economic growth with the inflation

23
rate of below 2 percent and he established structural breakpoint at 2 percent level of inflation and

as such inflation which is higher than 2 percent affect economic growth negatively. This poses a

serious policy question for Nigeria which has not recorded the rate of inflation less than 5

percent since 1986 with the lowest in 2007 as 5.4 percent and the highest being 72.72 percent in

1995. Khan and Senhadji (2001) in Vaona (2012) established the threshold of annual inflation

increase to be around 1 percent for developed countries while that of developing country which

Nigeria belongs at 11%. Ahmed and Mortaza (2005) empirically established a statistically

significant negative relationship between inflation and economic growth using CPI and real GDP

as proxy variables for Bangladesh for the period between 1980 and 2005. This reconciles with

the work of Saeed (2007) for Kuwait between 1985 and 2005 which indicates long run and

strong inverse relationship between CPI and real GDP.

Erbaykal and Okuyan (2018) established relationship between inflation and economic growth for

Turkey within the period of 1987 to 2006 and found out that there exists a negative and

significant relationship in the short run but no significant relationship was found between the two

variables in the long run. They further carried out causal relationship between the two variables

with the results establishing a causality relationship from economic growth to inflation.

Tan (2019) integrated the Philips curve within the framework of Okuns law for some members of

ASEAN, specifically, Malaysia, Singapore Thailand, the Philippines, the Indonesia, Japan and

South Korea, using quarterly data for the countries from 1991 to 2007. They empirically

established a small trade-off between economic growth and inflation in Singapore, South Korea,

and Thailand after 1997/98 ASEAN financial crises years while no trade-off relationship was

established for Malaisia, Philippines, Indonesia and Japan. Omoke and Oruta (2010) used the

data covering the period of 1970 to 2005 to establish possible relationship between inflation and

24
economic growth in Nigeria. He employed Johansen-Juselius Co-integration technique which is

considered superior to Engle and Grager (1987) in assessing co-integration properties of

variables in a multivariate context. The results showed a no cointegrating relationship between

inflation and economic growth for Nigeria. They further employed VAR-Granger causality at

two lag periods and established unidirectional causality running from inflation to economic

growth and he therefore concluded that inflation indeed has an impact on growth.

In Nigeria, the pursuits of higher economic growth in most cases have spiral effects on upward

price movement. According to Oladipo and Akinbobola (2011), Nigeria’s government has greater

influence on the nation’s economic activities through the use of fiscal instruments such as budget

deficit operation. He added that this fiscal policy in most cases has some effect on

macroeconomic variables such as interest rate, exchange rate, inflation, consumption, investment

etc. which in turn affect economic development. He reasoned further that the major impact of the

increase in budget deficit was felt in 1993 with high rate of inflation which shows an evidence of

a positive relationship between budget deficit and inflation in Nigeria. He further gave a view

that the source of financing the deficit has varying impact of a budget deficit on inflation. This

thinking makes Nigeria’s fight against high inflationary level difficult in the sense that the

economy being almost entirely monotype in nature finances its deficit from the petroleum sector.

This hinders the country from generating more investment which could ordinarily bring about

more employment and hence economic growth. This negates the postulation of the Philips curve

that there is a stable and negative relationship between the level of unemployment and the rate of

change of wage which indicate that unemployment being accompanied by falling wages, reduced

levels of unemployment by rising wages. The relationship of Philips connotes that as the wage

rates are increased, more demands will be stimulated giving rise to more investment of offset the

25
gap in demands and supply and that as the more demands persist, inflation will increase until

equilibrium is further achieved. Aminu and Anono (2012) viewed that unemployment and

inflation have two possible relationships; that is, in the short run and in the long. First, inverse

relationship exists between inflation and unemployment in the short run while in the long term

Philips curve is basically vertical as inflation is not meant to have any relationship with

unemployment. They said further that fight against inflation and unemployment are critical to the

social and economic life of every country as growth in productivity provides a significant basis

for adequate supply of goods and services which enhance welfare of the people as well as

promote the prgress of the entire system. Developing countries like Nigeria are faced with high

level of inflation beyond the single digit and thus undermine the pace of the growth. This

explains the position of Aminu and Anono (2012) that inflation and unemployment in Nigeria

constitute a vicious circle which is the bane of the endemic nature of poverty in developing

countries.

In addition, Ogwu (2010) maintained that inflation hurt the poorest the most as they have least

ability to protect themselves from the rising commodity prices. He added that the cost push

inflation comes as a result of depreciation of naira which raises the prices of essential commodity

prices as well as other imported commodities.

With the passage of time more wages increased will be demanded to offset the price hike and the

real wages will continue to depreciate as the price will keep on rising after wages might have

been increase to meet workers demand. This phenomenon is seen to impact negatively on the

non-working population as well as the low and medium income workers’ who may have not

benefited from the compensatory income increase or have little income increase that may not

match up with the wage increase within the economy.

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Nembee and Madume (2011) looked at inflation as one of the factors that create uncertain

business environment in Nigeria and other LDC (Less Developed Countries) which makes

foreign investors to choose a wait option for investment. They added that macroeconomic reform

policies or measures often adopted to address theshocks at times induce uncertainty in the

domestic economy. This can explain why the volume of FDI into Nigeria cannot adequately

address the problem of unemployment as well as serving as growth propeller as it is mostly

adjudged to be. Caves (1996) observes that the rationale to attract more FDI stem from the fact it

has positive effects on productivity, technology transfers, the introduction of new processes,

managerial skills and technical know-how in the domestic economy, employee training,

internationals production networks and access to markets. But empirical evidence from Nigeria

in a study by Ariyo (1998) on investment trend and its impact on Nigeria’s economic growth

between 1970 and 1997 shows no reliable evidence on the influence of the Nigeria’s economy

while Chinery and Stout (1966) established a negative effect of FDI on the Nigeria’s J. Econ. Int.

Bus. Manage. / Femi and Emmanuel 27 economic development. In furtherance on this study,

Ekpo (1995) reported that the political regime, real income per capital, rate of inflation, world

interest rate, credit rating and debt service were the key factors that accounts for the variability of

FDI into Nigeria. This shows that if the level of inflation is beyond the threshold foreign direct

investment will not be discouraged especially if other factors identified by Ekpo are not

favourable.

This is why Nembee and Madume (2011) after investigating empirically on the impact of

monetary policy on Nigeria’s macroeconomic stability between 1970 and 2009 concluded that

Nigeria should adopt the macroeconomic policy mix of monetary, fiscal and exchange rate in

27
managing inflation with the aim of achieving price stability required for achieving sustainable

growth and development.

The over-dependence on petroleum economy is a major factor responsible for the bottlenecks of

the supply side in Nigeria. According to Fatukasi (2012), factors such as agricultural bottlenecks,

industrial production, imports and exports, militancy, wage bill, government deficit financing

and money supply are responsible for inflation in Nigeria.

According to Kogid et al. (2022), inflation is a major macroeconomic problem which needs to be

curbed in the sense that low level of inflation indicates a positive effect on the economy whereas

high inflation gives negative signals to the economy. This explains why Emeka (2009) reasoned

that the pursuit of price stability invariably implies an indirect pursuance of other economic

objectives such as economic growth. He added that economic growth can only be achieved under

the condition of price stability and allocative efficiency of financial markets.

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 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter contains the research design, population of the study, sampling techniques and

methods used in collecting data.

3.2 Research Design

Descriptive survey research design was adopted for this study. A descriptive survey in the view

of Check and Schutt (2012) is the collection of information from a sample of individuals through

their responses to questions. According to Cozby (2007), descriptive survey studies use

questionnaires or interviews to collect evidence from people about themselves such as their

attitude and beliefs, demographics, past or intended behaviour and other facts. In addition,

descriptive survey is concerned with the collection of data for the purpose of describing and

interpreting existing conditions, prevailing practices, beliefs, attitudes, on- going process, etc.

Questionnaire will administered to generate data to determine the strategies, challenges and

outcomes of enhancing productivity.

3.4 Population of the study

The population of the study is the entrepreneurs of three local government namely Ado-Ekiti

LGA, Ikere-Ekiti LGA, Ekiti-West LGA area in Ado-Ekiti.

S/N LOCAL GOVERNMENT AREA ENTERPRENUER

1 Ado-Ekiti LGA 100

2 Ikere-Ekiti LGA 80

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 3 Ekiti West LGA 100

TOTAL 280

The Target Population of this study is 280 Entrepreneurs in the 3 Local Government of Ekiti

State

3.5 Sampling Technique(s) and sample size

A simple random sampling technique was used in this study. While Taro Yamenn formular was

used to the sample size for this study

Therefore, using Taro Yamenn's (1967) formula, the calculation of the sample size was as follow:

n=N/1+N(e)²

Where n sample size

N= population size

e = sample error (0.05)

n=280/1+280(0.05)²

n= 164.70588235294116

n=165.

Therefore 165 Sample size was used in this study and 165 questionnaires were distributed to the

respondents.

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3.5 Data Collection Techniques

The data was obtained through the means of the structured questionnaire. The departments used

as samples for this study were visited by the researcher. The researcher will explained the

purpose of the questionnaire to the people and made them understand that the information given

would not be used against them, but to be treated as confidential. On spot collection of the

questionnaire will be made to achieve high retrieval rate.

3.6 Research Instruments

A structured questionnaire was employed by the researcher to collect data from entrepreneur of

the above three local government of Ekiti State. The questionnaire was titled “Questionnaire on

the Inflation on Nigeria Economy growth”.

3.7 Validation of Research Instrument

Reliability means the accuracy of precision of a measuring instrument while validity means the

extent to which the research instrument measures what it is supposed to measure. In order to

determine the reliability and validity of the study, the test-retest method was used. To have a

valid instrument, the questions in the questionnaire will be free from ambiguity (i.e the questions

will not be too complex). To have reliable instrument, the questionnaire will be followed with

interview of sample of respondents to know their view on the subject.

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