Inflation Threshold And Inflation-Growth Nexus In Nigeria

Abstract

This study examines the inflation threshold and its effects on economic growth in Nigeria for the period 1980Q1-2022Q4. A non-dynamic threshold regression model developed by Khan and Senhadji (2001) was employed to identify the threshold effect of inflation on economic growth in Nigeria. The result indicates the existence of threshold effect of inflation on economic growth, established at 9.41%. In particular, holding inflation rate below or equal to the estimated threshold value, inflation has a significant positive effect on economic growth. Beyond the threshold level, inflation exerts a significant negative effect on economic growth. Precisely, the finding shows that economic growth would increase by 0.605% in response to a unit increase in the inflation rate. This reveals the desirability of inflation towards improving economic growth in this regime. Beyond the threshold level, inflation reduces the rate of economic growth by 0512% for every additional percentage increase in the inflation rate. Inflation rate in this regime is viewed as a disincentive and detrimental to economic growth due to its negative effects. The study recommends that government should maintain a relatively low and stable inflation rate and then choose an optimal inflation target consistent with steady and sustainable economic growth. That is, at most 9.41% inflation target.