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Archives of Business Research – Vol. 12, No. 11

Publication Date: November 25, 2024

DOI:10.14738/abr.1211.17801.

Harper, A., Sokunle, R., & Rachevski, I. (2024). Economic Growth, Money Supply, Government Spending, Government Revenue and

Inflation in Nigeria: An Empirical Perspective. Archives of Business Research, 12(11). 01-09.

Services for Science and Education – United Kingdom

Economic Growth, Money Supply, Government Spending,

Government Revenue and Inflation in Nigeria: An Empirical

Perspective

Alan Harper

Gwynedd Mercy University

Raufu Sokunle

Société Générale Investment Bank

Israel Rachevski

Western Gailee College

ABSTRACT

This study examines the relationship between real GDP (RGDP) and key economic

variables—money supply, inflation, government spending, government revenue,

and exchange rates—in Nigeria from 2004 to 2019. Using a multiple regression

model, the findings reveal a strong fit, with an R Square value of 0.723, indicating

that 72.3% of the variability in RGDP is explained by the model. The results show

that government spending and revenue have a significant positive impact on

economic growth, while inflation and money supply are associated with negative

effects. The exchange rate also positively influences RGDP, though to a lesser extent.

These findings highlight the importance of prudent fiscal and monetary policies in

fostering sustained economic growth in Nigeria.

Keywords: Inflation, Economic Growth, Nigeria, Regression

INTRODUCTION

Over the years, there has been an ongoing debate in the literature regarding the relationship

between inflation and economic growth in both developing and Western nations. Prior to the

1970s, the prevailing belief was that there was either no relationship or a positive relationship

between inflation and growth. Two major schools of thought have emerged on this issue. The

first is the structuralist perspective, which argues that inflation is essential and beneficial for

economic growth. The second is the monetarist perspective, which contends that inflation is

harmful to economic growth. Friedman (1973:4) succinctly encapsulated this debate by noting

that some countries have experienced economic growth with or without inflation.

In this paper, we contribute to this ongoing discussion by examining the relationship between

economic growth, money supply, and inflation in Nigeria. Nigeria was chosen due to its

prolonged struggle with high inflation and low economic growth, as well as its status as one of

the largest economies in the Sub-Saharan region with significant economic potential.

The purpose of this paper is to explore the relationship between inflation, money supply, and

economic growth in Nigeria. We use the Consumer Price Index (CPI) as a proxy for inflation and

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Archives of Business Research (ABR) Vol. 12, Issue 11, November-2024

Services for Science and Education – United Kingdom

Real Gross Domestic Product (RGDP) as a proxy for economic growth. Additionally, we include

Broad Money as a policy tool used by Central Banks to control inflation and promote economic

growth. A multiple regression model is developed to analyze this relationship.

The remainder of the paper is organized as follows: Section II provides a brief review of the

literature, Section III details the methodology and data sources, Section IV discusses the

empirical results, and Section V presents the conclusion.

LITERATURE REVIEW

Paul, Kearny, and Chowdhury (1997) investigated the relationship between inflation and

economic growth in eight developing countries over the period from 1960 to 1989. Their

findings indicated no significant relationship between inflation and economic growth.

However, other studies have found varying results, with some identifying a positive

relationship and others a negative one. For instance, studies by Fisher (1993), Barro (1996),

and Bruno and Easterly (1998) reported a negative relationship between inflation and

economic growth.

Mohanty et al. (2011) explored the possibility of a linear relationship between inflation and

economic growth in India using quarterly data. They suggested that an inflation rate of 4 to 5.5

percent could be considered an inflation threshold, although their findings were inconclusive

regarding the existence of both the threshold and the relationship between inflation and

economic growth.

Paul et al. (1997) used annual data covering the period from 1960 to 1989 on 48 developing

countries and 22 developed ones to reassess the relationship between inflation and economic

growth. Their studies revealed mixed results, with some countries showing a negative

relationship and others a positive one.

In 1974, the Central Bank of Nigeria examined the relationship between inflation and economic

growth in 11 African countries. The study found that the price coefficient in the growth

regression was negative for six countries, while it was positive for the remaining five. However,

the study's assumption that price was the only relevant variable influencing output was flawed,

rendering the results questionable.

Malla (1997) analyzed the relationship between inflation and economic growth in 11 OECD

countries using pooled time series data. The study found that the negative effects of inflation

on economic growth far outweighed any positive effects. These results corroborated the

findings of Bruno and Easterly (1998), who used a cross-country method to investigate the

relationship. Their research indicated that the negative impact of inflation on growth becomes

more apparent in countries with extreme inflation values, particularly those with double-digit

inflation rates. Bullard (1995) also affirmed the findings of Bruno and Easterly, noting that the

detrimental effects of inflation on growth only become significant once certain inflation

thresholds are exceeded.

Mallik et al. (2001) investigated the relationship between inflation and growth in four South

Asian countries by employing co-integration and error correction models. Their results