ABSTRACT
Economists tend to emphasize that
inflation causes economic damage by distorting investments and consumption
decisions. These distortions could result from households and businesses’
uncertainty about the effect of increases in prices of goods and services. When
inflation is stable, people are likely to have the same anticipation of its
future level, however, when inflation is volatile, future expectations will be
uncertain thereby hindering the ability to forecast with certainty. Investment
is an indispensable aspect of any economy as it drives the productive sectors
of the economy, however, the confidence to invest is eroded in at an atmosphere
of uncertainty in future prices of goods and services as a result of inflation,
it poses economic problem to that economy. The problem posed by inflation on
investment affects both the private and public sectors of the economy. It
triggers prices of goods and services if not properly managed as well as reduce
the zeal for investment; it increases the cost of doing business such as
increases in transaction cost, information cost and these inhibit economic
growth and development. It is against this background that this study examined;
the impact of inflation on core credit to the private sector of the Nigerian
economy, the impact of inflation on foreign exchange availability for private
sector investment in the Nigerian economy, the impact of inflation on non-infrastructural
investment of the public sector of the Nigerian economy and the impact of
inflation on infrastructural investment of the public sector of the Nigerian
economy. Time series data for 25years, 1987-2011 were collated from Central
Bank of Nigeria published annual reports and statistical bulletin for the
country aggregate data. Four hypotheses were formulated and the least square
(LS) regression was used to estimate the effects of Inflation on Investment in
Nigeria. The annual rate of inflation was adopted as the independent variable
for the four hypotheses while dependent variables were Core Credit to the
Private Sector, Foreign Exchange for Import, Non-infrastructural Investment and
Infrastructural Investment for the four hypotheses. The findings from the study
revealed inflation has negative and non-significant impact on the core credit
to private sector in Nigeria (coefficient of inf = -1.216, t-value = - 0.948).
Inflation has positive and non-significant impact on the foreign exchange
availability in Nigeria (coefficient of inf = 0.013, t-value = 0.291).
Inflation has negative and non-significant impact on the non-infrastructural
investment in Nigeria (coefficient of inf = -0.33, t-value = - 1.107).
Inflation had negative and significant impact on infrastructural investment
(coefficient of inf = -0.386, t-value = -3.637). The study thus recommends
among others that monetary policy authorities should ensure that policies that
will assist in maintaining a stable general price level are pursued. This will
guarantee a steady growth in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
Some recent studies have found
cross-country evidence supporting the view that long -term growth is adversely
affected by inflation (Kormendi and Meguire 1985; Fischer 1983, 1991, 1993; De
Gregorio 1993; Gylfason 1991; Roubini and Sala-i-Martin 1992; Grier and Tullock
1989; Levine and Zervos 1992). Countries (especially in Latin America) that
have experienced high inflation rates, have also witnessed lower long-term
growth (Cardoso and Fishlow 1989; De Gregorio 1992a, 1992b). This literature is
part of the endogenous growth literature, which tries to determine the causes of
differences in growth rates in different countries. There is now considerable
evidence that investment is one of the most important determinants of long-term
growth (Barro 1991; Levine and Renelt 1992). It has often been suggested that a
stable macroeconomic environment promotes growth by providing a more conducive
environment for private investment. This issue has been directly addressed in
the growth literature in the work by Fischer 1991, 1993; Easterly and Rebelo
1993; Frenkel and Khan 1990; and Bleaney 1996. Among the reasons why high
inflation is likely to be adverse for growth are: economies that are not fully
adjusted to a given rate of inflation usually suffer from relative price
distortions caused by inflation. Nominal interest rates are often controlled,
and hence real interest rates become negative and volatile, discouraging
savings. Depreciation of exchange rates lag behind inflation, resulting in
variability in real appreciations and exchange rates; real tax collections do
not keep up with inflation, because collections are based on nominal incomes of
an earlier year (the Tanzi effect) and public utility prices are not raised in
line with inflation. For both reasons, the fiscal problem is intensified by
inflation, and public savings may be reduced. This may adversely affect public
investment and high inflation is unstable. There is uncertainty about future
rates of inflation, which reduces the efficiency of investment and discourages
potential investors.
Fischer (1993) examines the role
of macroeconomic factors in growth. He found evidence that growth is negatively
associated with inflation and positively associated with good fiscal
performance and undistorted foreign exchange markets. Growth may be linked to
uncertainty and macroeconomic instability where temporary uncertainty about the
macro-economy causes potential investors to wait for its resolution, thereby
reducing the investment rate (Pindyck and Solimano 1993). Uncertainty and
macroeconomic stability are, however, difficult to quantify. Fischer suggests
that, since there are no good arguments for very high rates of inflation, a
government that is producing high inflation is a government that has lost
control. The inflation rate thus serves as an indicator of macroeconomic
stability and the overall ability of the government to manage the economy.
Fischer found support for the view
that a stable macroeconomic environment, meaning a reasonably low rate of
inflation, a small budget deficit and an undistorted foreign exchange market,
is conducive to sustained economic growth. He presents a growth accounting
framework in which he identifies the main channels through which inflation
reduces growth. He suggests that the variability of inflation might serve as a
more direct indicator of the uncertainty of the macroeconomic environment.
However, he finds it difficult to separate the level of inflation from the
uncertainty about inflation, in terms of their effect on growth. This is
because the inflation rate and its variance are highly correlated in
cross-country data. Evidence is in favour of the view that macroeconomic
stability, as measured by the inverse of the inflation rate and the indicators
of macroeconomic trends, is associated with higher growth.
A good number of factors have been
identified as the causes of inflation in Nigeria, which according to Nwankwo
(1981) they includes excess demands, rising cost of production, limiting
outputs and increasing money supply. People’s immediate concern is with how
their income holds up with changes in their expenses. Businesses care about how
the prices of their product do....
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Item Type: Postgraduate Material | Attribute: 86 pages | Chapters: 1-5
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