Inflation and Growth Nexus Re-visited: Financial and Practical Implications of the Threshold Effect in Nigeria

Abstract

The relationship between inflation and economic growth has been a subject of enduring interest and debate in the field of economics. This study revisits the inflation and growth nexus in Nigeria, with a particular emphasis on the threshold effect – a non-linear phenomenon positing that the impact of inflation on growth varies depending on the level of inflation. Specifically, the study examines the threshold effect of inflation on growth in Nigeria using secondary data from 1986 to 2022, and employs two-regime threshold autoregressive regression modelling. The findings show that the pattern of relationship between inflation and growth is indeed nonlinear and conditional on certain levels of inflation rate. Findings reveal that the optimal threshold for inflation rate is 15.7%. Below the identified threshold, moderate inflation was associated with growth stimulation through mechanisms like reduced real interest rates and increased investment. However, beyond this threshold level (15.7%), the negative effects of inflation became pronounced, hindering economic growth in Nigeria. The findings of this study have several implications for Nigeria's monetary and fiscal policies, offering guidance on how to maintain inflation within a growth-stimulating range. Additionally, businesses and investors operating in Nigeria will gain insights into adapting their strategies to mitigate risks and capitalize on opportunities arising from varying inflation levels. Ultimately, this study contributes to the ongoing discourse on the inflation and growth nexus, providing valuable insights for policymakers navigating Nigeria's economic landscape about the threshold effect of inflation and its financial and practical implications for Nigeria's economic stability and growth prospects.

Keywords: Economic growth; Inflation; Threshold analysis; Nigeria.