Inflation and Economic Growth Dynamics in Nigeria: Evidence from the SVEC Model and Frequency-Domain Causality Approach

Abstract

The inflation-growth relationship has been a central issue in macroeconomic policy debates, particularly in developing economies like Nigeria. In this regard, this study examines the dynamic relationship between inflation and economic growth in Nigeria from 1981 to 2021. Specifically, it investigates the long-run impact of inflation on growth, the short-run adjustment process, and the direction of causality between them. The findings reveal a negative long-run relationship between inflation and economic growth, while interest rates and physical capital accumulation are positive long-run drivers of growth. Except for interest rates, all variables significantly adjust towards long-run equilibrium aftershocks. The impulse response analysis shows that aggregate demand shocks to inflation initially raise GDP, while supply shocks have a lasting effect on inflation. Additionally, investment shocks have a persistent positive effect on growth, whereas interest rate shocks exert a negative but transitory influence on both output and prices. The frequency causality tests indicate that inflation causes growth in the short and medium run, but not vice versa. Based on these findings, it is recommended that policymakers ensure stable inflation, support capital accumulation, and align interest rate policies with growth objectives