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IMPACT OF INFLATION ON ECONOMIC GROWTH OF NIGERIA (1981 - 2010) PROJECT PROPOSAL BACKGROUND OF THE STUDY The word inflation

rings a bell in the market economics of the world. It is a mo nster that threatens all economics because of its undesirable effects. The probl em of inflation surely is not a new phenomenon. It has been a major problem in t he country over the years. Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy (Lipsey and Chrystal, 1995). Inflation is a household word in many market oriented economics. Althoug h several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or ev en bother to know about the mechanics and consequences of inflation. After an appreciable economic performance in the early 1970s, the Nigeria econom y witnessed some anxious moment in the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by high monetary ex pansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits t o the banks and the resultant increase in their free reserves with adverse conse quences on the general price level. The inflationary pressure was further aggrav ated by high demand for imports of both intermediate inputs and consumer goods d ue to over valuation of the naira which made imports relatively cheaper than loc ally manufactured goods. In this case, the impediments to development may be ref erred to as cost. Economics theory, however, postulates that for the profit to b e maximised, cost should be minimised. One of the main cost is inflation, which has turned into a canker worm eating deep into the nation s path of economic progr ess. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. The economy faced renewed pressures and some uncertainty towards the end of the year as the C.B.N gradually relaxed its tight monetary policy. Undoubtedly one of the macroeconomic goals which the government strives to achie ve is the maintenance of stable domestic price level. This goal is pursued in or der to avoid cost of inflation or deflation and the uncertainty that follows whe re there is price instability (Salam et al, 2006). The effects of inflation on e conomic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth. STATEMENT OF THE PROBLEM There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth. Over the ye ars the question of the existence and nature of the link between inflation and g rowth has been the subject of considerable interest and debate (Erbaykal and Oku yan, 2008). Although the debate about the precise relationship between these two variables is still open, the continuing research on this issue has uncovered so me important results. In particular, it is generally accepted that inflation has a negative effect on medium and long-term growth (Bruno and Easterly, 1998). In flation impedes efficient resource allocation by obscuring the signalling role o f relative price changes, the most important guide to efficient economic decisio n-making (Fischer, 1993). If inflation is inimical to growth, it obviously follows that policymakers shoul d aim at a low rate of inflation. But how low should inflation be? Should it be 10 percent, 5 percent, or for that matter, zero percent? Or put in other words, is there a level of inflation at which the relationship between inflation and gr

owth become negative? The empirical test of the impact of inflation on the Niger ian economy which is the subject matter of this study shall provide precise answ er to the relationship between inflation and growth and how the problem could be tackled. OBJECTIVES OF THE STUDY The broad objective of this study is to examine inflation in developing countrie s with the view of ascertaining the effect of inflation on economic growth. The specific objectives of this study are to: (i) examine the trend of inflation in Nigeria over the years; (ii) investigate the impact of inflation on the economic growth of Nigeria; (iii) Explore the effect of inflation on capital formation in Nigeria; (iv) Examine the influence of inflation on peoples consumption; (v) Suggest visible solutions to the problem of inflation in the country. RESEARCH QUESTIONS This study would be guided by the following research questions: 1. What is the trend of inflation in Nigeria? 2. How does Inflation impact on economic growth in Nigeria? 3. What is the effect of inflation on the level of capital formation in Nigeria? 4. How does inflation affect the consumption expenditure of Nigerian households? STATEMENT OF HYPOTHESES The hypotheses to be tested in the course of this study are stated below: Hypothesis I Ho : Inflation does not affect significantly the economic growth of Nigeria. H1 : Inflation affect significantly the economic growth of Nigeria. Hypothesis II Ho : Inflation does not affect significantly capital formation in Nigeria. H1 : Inflation affect significantly capital formation in Nigeria. Hypothesis III Ho : there is no significant relationship between inflation and consumption expe nditure of people in Nigeria. H1 : there is relationship significant between inflation and consumption expenditure of people in Nigeria. SIGNIFICANCE OF THE STUDY A vital component of any move towards macroeconomic stability and growth is an i ntegrated efforts towards price stability. In order to identify the macroeconomi c effect of inflation persistence in Nigeria, this study would investigate the i mpact of inflation on macroeconomic variables such as productivity, investment, and consumption. This study is significant in the followings ways: a. it would have a direct effect on the efficiency and effectiveness of the use of policy instruments in the stabilisation of macroeconomic variables to stimula te production and investment. b. it would reveal the remote and immediate causes of inflation in Nigeria with due consideration to theoretical foundations. c. it would also provide an explanation for Nigeria s stunted growth. SCOPE OF THE STUDY This study shall focus on the effect of inflation on economic growth in Nigeria as necessitated by the inflationary pressure generated by recent global economic crisis through the exchange rate sensitivity. Despite various policies that had been formulated and implemented, no meaningful progress has been made in the co mbat of inflation. Therefore, this study examines not only the effect of inflati on on the economic growth, it also investigate its effect on other macroeconomic variables. The effect of inflation on economic growth shall be investigated emp irically with the data spanning from 1981 to 2010. The choice of the period of r eference is significant because inflation constituted a matter of serious policy

consideration. The period witnessed a steady and positive growth in the money s upply. This period encompasses the major landmarks in our national economy. Betw een 1981 to early part of 2001 stringent economy stabilization measures were in operative as a result of the dramatic down turn of international oil market. By the middle of 1986, the economy was deregulated and thus came the regime of Stru ctural Adjustment Programme (SAP). The period between 1993 and 2010 was a period of the political instability that affects every sector of the economy. ORGANISATION OF THE STUDY This study shall be divided in five chapters. The research shall commence by pro viding a background of the subject matter justifying the need for the study in c hapter one. Chapter two shall present related literatures concerning inflation, its causes and effects. The research methodology shall be outlined in chapter th ree, while the data presentation and analyses shall be made in chapter four as w ell as highlights of the implications of the findings. Concluding comments in ch apter five shall reflect on the findings of the study, and recommendations based on the the findings. REFERENCES Bruno, M. and Easterly, W. (1998) Inflation Crises and Long-Run Growth . Journal of Monetary Economics, Vol. 41, pp. 3-26. Erbaykal, E. and Okuyan, H. A. (2008) Does Inflation Depress Economic Growth? Evi dence from Turkey . International Research Journal of Finance and Economics, Issue 17, pp. 40-48. Fischer, S. (1993) The Role of Macroeconomic Factors in Growth . Journal of Monetar y Economics, Vol. 32, pp. 485-512. Lipsey R. G. and Chrystal K. A. (1995) An Introduction to Positive Economics 8th Edition. Oxford: Oxford University Press. Salam, M. A., Salam, S. and Feridun M. (2006) Forecasting Inflation in Developing Nations: The Case of Pakistan . International Research Journal of Finance and Eco nomics, Issue 3, pp. 138-159.

PROJECT PROPERTIES Number of Chapters 5 Number of Pages 88 Number of Words 13,986 Number of References 40 Project Level B.Sc. Price N10,000 Abstract, Regression Data and Results are included