Inflation Tresholds and Economic Growth

Ajide, K.B ; Lawanson, O.I (2012)

Staff Publications

Article

Inflation is one of the most challenging macroeconomic objectives capable-of frustrating every pragmatic effort at achieving other macroeconomics goals ifnot curtailed. To this end, the paper empirically examines the threshold inflaiion rate that is considered optimally reasonable for maintaining a sustainable economic growth. The study in specific terms employs a least square multivariate approach to estimate a threshold level of inflation. Further, error correction modeling (EeM) approach was explored to identify the long run relationship amon~ other, major determinants of real GDP growth using a simple augmented production function. In addition, a ' pairwise granger causality test was conducted to explore the causal link between the inflation and growth of real GDP. Interestingly, it was observed from the causality test that there was neither bidirectional nor unidirectional causality between the two but rather an independent relationship: The findings from least square estimation also established 9% threshold inflation leve/. The results from EeM confirmed the values of lagged of real GDP growth rates, investment; Current inflation, population growth and terms of trade as important factors affecting growth rates of real GDP in Nigeria. Based on the outcome ?f the results it was therefore suggested that an identification of country-specific inflation. thresholds in the inflation-growth relationship might provide useful information about the appropriate location and width of an inflation targeting band.