PROJECT PROPOSAL

BACKGROUND OF THE STUDY

The word inflation rings a bell in the market economics of the world. It is a monster that
threatens all economics because of its undesirable effects (Imobighe, 2012; Adenuga, et al.
2012). Even though some evidence suggests that moderate inflation helps in economic growth,
the overall weight of evidence so far clearly indicated that inflation is inimical to growth (Bawa
and Abdullahi, 2012; Omotosho and Doguwa, 2013). The problem of inflation surely is not a
new phenomenon. It has been a major problem in the 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). According to Umaru and Zubairu, (2012) the concept of inflation can be
define as a persistence rise in the general price level of broad spectrum of goods and services in a
country over a long period of time. They state that Inflation has been intrinsically linked to
money, as captured by the often heard maxim inflation is too much money chasing too few
goods. Inflation is a household word in many market oriented economics. Although 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 even bother to know about the mechanics and consequences of
inflation.

After an appreciable economic performance in the early 1970s, the Nigeria economy 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 rapid growth in domestic money supply, exacerbated by the
monetization of the earnings from oil (Kumapayi, et al., 2012) and high monetary expansion as
the huge government deficit was financed largely by the Central Bank of Nigeria. This was
exacerbated by the transfer of government sector deposits to the banks and the resultant increase
in their free reserves with adverse consequences on the general price level. The inflationary
pressure was further aggravated by high demand for imports of both intermediate inputs and
consumer goods due to over valuation of the naira which made imports relatively cheaper than
locally manufactured goods. In this case, the impediments to development may be referred to as
cost. Economics theory, however, postulates that for the profit to be maximised, cost should be
minimised. One of the main cost is inflation, which has turned into a canker worm eating deep
into the nations path of economic progress. 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 CBN gradually relaxed its tight monetary policy.
Undoubtedly one of the macroeconomic goals which the government strives to achieve is the
maintenance of stable domestic price level. This goal is pursued in order to avoid cost of
inflation or deflation and the uncertainty that follows where there is price instability (Ibrahim and
Agbaje, 2013; Salam et al, 2006). The effects of inflation on economic 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.
As it is generally believed that the attainment of every other macroeconomics goals depend on
the maintenance of a stable and low inflation environment (Ajide and Lawanson,
2012).
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 years the question of the existence
and nature of the link between inflation and growth has been the subject of considerable interest
and debate (Erbaykal and Okuyan, 2008). While the structuralists argue that inflation is crucial
for economic growth, the monetarists posit that inflation is harmful to economic growth
(Doguwa, 2013). Although the debate about the precise relationship between these two variables
is still open, the continuing research on this issue has uncovered some important results. In
particular, it is generally accepted that inflation has a negative effect on medium and long-term
growth (Bruno and Easterly, 1998). Inflation impedes efficient resource allocation by obscuring
the signalling role of relative price changes, the most important guide to efficient economic
decision-making (Fischer, 1993). Kumapayi, et al. (2012) reveals that over the last few decades,
high inflation in Nigeria has caused yield on investment to decline while government policy
objectives has been adversely affected as the real size of its budget shrinks with rising inflation
which has hampered economic growth. Contrarily, Omotosho and Doguwa (2013) found that the
periods of high inflation volatility in Nigeria are associated with periods of specific government
policy changes, shocks to food prices and lack of coordination between monetary and fiscal
policies.

However, most previous studies have focused on the effect of inflation on growth in developed
countries while little attention has been paid to developing countries. It is therefore imperative to
conduct a research into the effect of inflation on economic growth in developing countries with
special focus on Nigeria, which is the main thrust of this study.
OBJECTIVES OF THE STUDY
The broad objective of this study is to examine inflation in developing countries 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 expenditure of people
in Nigeria.
H1 : there is relationship significant between inflation and consumption expenditure of people in
Nigeria.
RESEARCH METHODOLOGY
The analysis to be made in this study shall be based on time series data for Nigerias inflation
rate, Gross Domestic Product, Gross Fixed Capital Formation, and Private Consumption
Expenditure. Due to the linearity nature of the model formulation, Ordinary Least Square (OLS)
estimation method was employed in obtaining the numerical estimates of the coefficients in the
model using Statistical Software for Social Sciences (SPSS).
Three simple regression models shall be used in the estimation. The first model would seek to
investigate the effect of inflation on the economic growth of Nigeria, the second model seeks to
examine the effect of inflation on capital formation (investment) while the third model probe the
impact of inflation on private consumption expenditure. The estimation period would be
restricted to the period between 1981 and 2012 due to non-availability of needed data. Besides
the regression analysis, tables and charts were also used to examine the trend of inflation rate
over the years.

Secondary data shall be the basis of data to be used in this study. They would be sourced mainly
from the publications of the Central Bank of Nigeria (CBN) namely; CBN Statistical Bulletin,
CBN Annual Reports, CBN Economic and Financial Review Bullion, and Bureau of Statistics
publications. The variables for which data were sourced include: Inflation rate, and Gross
Domestic Product, Gross Fixed Capital Formation, and Private Consumption Expenditure for the
period 1981 to 2012.
SIGNIFICANCE OF THE STUDY
A vital component of any move towards macroeconomic stability and growth is an integrated
efforts towards price stability. In order to identify the macroeconomic effect of inflation
persistence in Nigeria, this study would investigate the impact 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 stimulate 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 Nigerias 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 combat of inflation. Therefore, this study examines not only the
effect of inflation on the economic growth, it also investigate its effect on other macroeconomic
variables. The effect of inflation on economic growth shall be investigated empirically with the
data spanning from 1981 to 2012. The choice of the period of reference is significant because
inflation constituted a matter of serious policy consideration. The period witnessed a steady and
positive growth in the money supply. This period encompasses the major landmarks in our
national economy. Between 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 Structural Adjustment
Programme (SAP). The period between 1993 and 2012 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 providing a
background of the subject matter justifying the need for the study in chapter one. Chapter two
shall present related literatures concerning inflation, its causes and effects. The research
methodology shall be outlined in chapter three, while the data presentation and analyses shall be
made in chapter four as well as highlights of the implications of the findings. Concluding
comments in chapter five shall reflect on the findings of the study, and recommendations based
on the the findings.

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