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The
Determinants Of Inflation In Nigeria
ABSTRACT
Inflation is
one of the macroeconomic problems facing many developing countries today and
Nigeria is not exempted. Inspite of the use of monetary and fiscal policy
measure. For controlling inflation in Nigeria, inflation still remain a serious
and contentious problem in Nigeria. The major purpose of the study is to
highlight the determinants of inflation in Nigeria and to check the trend of
inflation overtime and the measures to curb it.
−
The data
were largely the secondary type and the main sources is the CBN statistical
bulletin for the period of 1980 – 2009.
The methodology involves the use of classical linear regression model using
E-views econometric package. These include R2 and adjusted R2 to test the explanatory
power of the estimates, t-test to determine the significance of the entire
regression plan and the second order tests which includes test for
auto-correlation, test for stationary, Normality test. The regression result shows that Government
expenditure have a positive impact on inflation while real exchange rate, real
GDP and money supply have a negative impact on inflation respectively. This
implies that an increase in money supply, real GDP and real exchange rate will
reduce inflation while an increase on government expenditure will increase
inflation. The researcher advices that monetary and fiscal policies should be
used to control and direct economic activities of a country to avoid inflation.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The avoidance of rapid increase in
price which in turn leads to inflation is one of the macroeconomic objectives
of any economy. Inflation as the name implies can be described as a sustained
rise in prices (Johnson), a continuing increase in the general price level (Brooman),a persistent and appreciable rise
in the general level of prices (Shapiro)
and a continuing rise in prices as measured by an index such as the consumer
price index (CPI) (Dernbery and Mc
Dongall).
Robert J.
Gordon describes three major types of inflation as the “triangle model’’ and
these includes demand-pull inflation, cost-push inflation and built-in
inflation.
Demand-pull
inflation according to him is caused by an increase in aggregate demand due to
increased private and government spending.
Cost-push
inflation also known as Supply shock inflation is caused by a drop in aggregate
supply as a result of natural disasters or increased prices of inputs.
Built-in
inflation is induced by adaptive expectations and involves workers trying to
keep their wages up with prices and firms passing these higher labour costs
onto their customer as higher prices, leading to a vicious circle”.
The presence
of inflation in an economy leads to a fall in the function of money as a medium
of exchange and a store of value.
Inflation
started in Nigeria after the 2nd world war. The central bank of Nigeria being part of the macroeconomic management
indulges in finding out the determinants of inflation in the economy and sets
up the required macroeconomic policies that will help to reduce the
inflationary rate in the economy.
Inflation
can be the form of galloping inflation which is a situation whereby
inflationary rate becomes immensurable and uncontrollable ( that is the rise in
price is from 20 to 100 percent per annum or more) it is also known as hyper/
runway inflation.
The Nigeria
economy is experiencing a situation of stagflation (that is the presence of
unemployment coupled with high rate of inflation)
Several
theories have been suggested by economists to describe the nature and causes of
inflation and one of such theories is
the demand pull theory which is the rise in aggregate demand and less supply of
goods (that is too much money chasing fewer goods).
Inflation in
Nigeria have really affected one of the factors of production land to be precise by its continuous price
increase and demand by the comprador bourgeois who use it for their various
investments.
However,
inflation is described as a persistent rise in the general price level and it’s
the dependent variable in this course of study.
1.2 STATEMENT OF THE PROBLEM
Inflation
has a negative impact in the economy as a whole. If it is not backed up with an
increment in the wages and salaries of workers, it leads to a fall in the
standard of living and economic development of a nation.
High or
unpredictable inflation rates are regarded as being harmful to the over all
economy. They add deficiencies in the market and make it difficult for
compaines to budget or plan long- term. Uncertainty about the future purchasing
power of money discourages investment and saving.
Developing
nations have been crippled in the aspect of obtaining higher rate of capital
formation due to severe and prolonged inflation.
In Nigeria,
some of the macroeconomic variables determining inflation are said to be real
GDP exchange rate, government expenditures and money supply.
This study
looks into these determinants of inflation and tries to provide appropriate
macroeconomic policies that will lead to
its reduction.
1.3 OBJECTIVE OF THE STUDY
The
objectives of this study are;
1. To determine the possible determinants of
inflation rate in the country.
2. To provide possible economic policies and
solutions to the issue of inflation in
Nigeria.
1.4 RESEARCH HYPOTHESIS
This
hypothesis is formulated to acquire necessary information and basic assumption
to the study
H0: There is no significant relationship
between inflation rate and money
supply,
exchange rate, real Gross Domestic product and Government expenditure leading
to a negative impact on inflation in Nigeria.
H0: K0 = 0
H1: There is significant relationship between
inflation rate and money
supply,
exchange rate, real Gross domestic product and Government expenditure leading
to a positive impact on inflation in Nigeria.
H1: K1 ≠ 0
1.5 SIGNIFICANCE OF THE STUDY
This study
apart from its set objectives will be important in the following ways:-
(1) It will help policy makers in their zeal
to establish policy measures for handling the issue of inflation in Nigeria.
(2) It will advance the knowledge of users on
inflation.
(3) It will serve as a guideline for further
research work on this particular
topic.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
This
research work is from the period of 1980 to 2009 and is being limited by
finance and time. Notwitstanding its limitations, it is assumed that it will
serve the purpose for which it is carried out.
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