An Estimation and Assessment of Inflation Threshold for Nigeria 1970-2008

The debate among scholars on inflation and economic growth has taken a long way in the empirical literature, with the issues coming to life in the twenty-first century following the growing movement of monetary authorities to perfect inflation targeting in developed and emerging economies. This paper uses the threshold model developed by Khan and Senhadji (2001) to estimate inflation threshold levels for Nigeria, motivated by the trend of most developing countries and emerging countries towards inflation targeting and the concern that high inflation levels are detrimental to economic growth. The research utilises data from annual time series distributed over two periods between 1970-2008 and 1980- 2008 to assess the inflation threshold for Nigeria and to determine if the threshold amount has substantially changed over the two years. In the sample period 1970-2008, we defined an inflation threshold of 8 percent for Nigeria using a nonlinear inflation-growth model control variable such as growth in the ratio of large money supply to GDP (GLM2/GDP) and growth in terms of trade (GLTOT). We expect an inflation threshold of 7 percent for the period 1980-2008, even if the significance test fails. This result is important for the formulation of monetary policy, given that, over the past decades, the Central Bank of Nigeria has been targeting single-digit inflation without necessarily targeting the optimum point at which inflation becomes unfriendly to growth.

Author (s) Details

Doyin Salami
Lagos Business School, K.M 22 Lekki-Aja Expressway, Lagos Island, Lagos State, Nigeria.

Dr. Ikechukwu Kelikume
Lagos Business School, K.M 22 Lekki-Aja Expressway, Lagos Island, Lagos State, Nigeria.

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