EFFECT OF INFLATION AND EXCHANGE RATE OF NAIRA TO US DOLLAR ON

ECONOMIC GROWTH IN NIGERIA FROM (2000-2021)

BY

SAN'ANA ISAH

HND/STA/20/005M

SUPERVISOR: MALAM NURA ISAH

OCTOBER 2022
 CHAPTER ONE

1.1 INTRODUCTION AND BACKGROUND

To achieve rapid economic growth, as well as low inflation rate are the main goals of

macroeconomic policies in any economy. According to Bill & Khan (2008), most researchers,

policymakers and economists have agreed that zero inflation is not healthy for an economy and

as a result should be discouraged. This is because; deflation has serious effects on economic

growth and development of a country. Thus, moderate inflation enhances nation’s domestic

economy, while high inflation is inimical to the growth and development of the domestic

economy (Mubarik, 2005). In view of the above, the policymakers, as well as the monetary

authorities are advised to work toward achieving low rate of inflation in an economy, as that

would help to maximize the overall economic well-being of citizens in their countries.

Generally, high inflation imposes welfare costs on a nation, hinders efficient allocation of

resources by affecting the role of changes in the relative price level, and as well discourages
investments and savings in an economy as it creates unpredictable future prices. The situation

also affects financial development because it makes financial intermediation more costly, and

the poor are mostly affected because they rescind in holding financial assets that provides a

hedge against high inflation and decreases a country’s international competitiveness by making

exports more expensive. It also has negative effect on payments balance, and reduces long-term

growth of a country. Business and households perform poorly during the period of high inflation

(Frimpong & Oteng-Abayie, 2010). Taiwo (2011) inflation in Nigeria has become a major

threat to economic activities, especially on workers whose standard of living declines

continuously. The inflationary factors traced to Nigeria’s high inflation include continuous hike

in petroleum price and exchange rate depreciation/devaluation. These increases in the two

variables (price of petroleum and exchange rate depreciation) have been blamed for the

increases in the transportation costs, input materials, foodstuffs, rents, and goods and services

coupled with the exchange rate depreciation in Nigeria. Inflation in an economy can be

measured using consumer price index approach and wholesale or producer price index approach.

The period to period changes in wholesale or producer price index are used as direct measures of

inflation, though not the best measure of inflation in Nigeria. The consumer price index (CPI)

approach on the other hand, is the least efficient of the approaches used in measuring inflation

rates in Nigeria, yet it is the most used measure of inflation, because it is easily and currently

available on monthly, quarterly and annual basis (CBN, 1991).

To control inflation in the country, the Central Bank of Nigeria (CBN) often adopts monetary

policies with the aim of achieving price stability, as well as sustainable economic growth. The

monetary authorities in an attempt to achieve the overall inflation objective of the government

via effective monetary management, sets intermediate and operating targets that is in line with
the targets for GDP growth, inflation rate and balance of payments (Sani & Abdullahi, 2011).

Despite all the monetary policies adopted by the monetary authorities to reduce high inflation in

Nigeria, the rate of inflation in the country is still high with the standard of living of the citizens

decreasing continuously. It is against this background that the study investigates the effect of

inflation on economic growth of Nigeria for the period of 1980-2015.

1.2 STATEMENT OF THE PROBLEM

This study is very important to macroeconomists, financial analyst, academicians, policy makers

and central bank officials in understanding the responsiveness of GDP to the change in general

price level and thus come up with the relevant policies so as to keep prices at the reasonable rate

that stimulate production. It is necessary to policy makers to clear doubt as many studies on the

relationship between inflation and economic growth remains inconclusive, several scholars

conducted researches to identify the impact of inflation and exchange rate on economic growth

for different countries and on different period. For this reason, I intend to conduct this research.

1.3 AIM AND OBJECTIVES

The aim of this research is to analyze data on inflation, exchange rate and economic growth in

Nigeria for the period of 22years

The aim of this research can be achieved by the following objectives:

1. To identify whether there is significant impact of inflation rate, exchange rate on

Nigerian economic growth.

2. To identify whether there is linear relationship between inflation and economic growth.

3 Identify whether there is linear relationship between exchange rate and economic growth.
1.4 SCOPE AND LIMITATION OF THE STUDY

Quarterly data for Nigerian inflation rate, exchange rate from naira to US dollar and economic

growth will be adopted in this research for the period of first quarter 2000 to the fourth quarter

of 2021 the data will be a secondary data, which will be collect from Central Bank of Nigeria to

web site.

1.5 SIGNIFICANT OF THE STUDY

1This study will be valuable to policy makers and government in assessing the

effectiveness of monetary policy and macro-economic in stabilizing the economy inflation.

2 It will add to the existing literature on the topic under study and will also serve as

references for research work in similar studies.

3 The study will be useful to many statistical agencies such as national Bureau of statistics

(NBS), central bank of Nigeria (CBN), etc.

4 The study will be to student for another researcher who will undergo the study under

impact of Nigerian inflation on economic growth.

1.6 STATISTICAI HYPOTHESIS

H0: there is no significant difference between the economic growth and inflation rate

H1: there is significant difference between the economic growth and inflation rate

H0: there is no linear relationship between economic growth and inflation rate

H1: there is linear relationship between economic growth and inflation rate

1.7 DEFINATION OF TERMS

Exchange: to replace with similar items

Rate: a contain quality or amount of one thing considered in relation to a unit of another thing

and use as standard measures or is a ratio that two quality having different ubnit of measure.

Exchange Rate: an exchange rate is the price at which one country’s currency must pay in order

to buy one unit of another country’s currency on foreign exchange market. Or is the price of

currency express in another currency it is the another currency it a s one of the most important

determination of a country’s relative level of economic health.

EFFECT; Is a change which as a result or consequence of an action or other cause

INFLATION: The rate of increase in prices over a give period of time. Inflation is typically

Abroad measure, such as the overall increase in prices or the increase in the cost of living

In country.

ECONOMIC GROWTH: can be defined as the increase or improvement in the inflation-adjusted

market value of the goods and services produced by an economy over a certain period of time.

Statisticians conventionally measure such growth as the percent rate of increase in the real gross

domestic product, or real GDP

 CHAPTER TWO

2.0 LITERATURE REVIEW

Erbaykal & Okuyan (2008) investigated the nexus between inflation and economic growth in

Turkey from 1987 to 2006 through the applications of cointegration test and Toda-Yamamoto

approach to causality test. The result showed that inflation does not have significant long run

relationship with economic growth in Turkey. The results of the Toda-Yamamoto approach to
causality test indicate unidirectional relationship between inflation and economic growth, with

causality running inflation to economic growth.

Saaed (2007) studied the relationship between inflation and economic growth in Kuwait from

1985 to 2005 using co-integration approach. The results of the study indicate that there is long

run relationship between real gross domestic product (GDP) and consumer price index (CPI) in

Kuwait.

Ahmed & Mortaza (2005) examined the nexus between inflation and economic growth in

Bangladesh for the period 1980-2005 by employing cointegration test and error correction

model. The study employed consumer price index (CPI) and gross domestic product (GDP) in

the investigation. The results revealed that long run relationship exists between inflation and

economic growth. Similarly, the results showed that inflation has negative relationship with

economic growth in Bangladesh for the period studied.

Sweidan (2004) investigated the relationship between inflation and economic growth in Jordan

from 1970 to 2003 using chow breakpoint test. The results indicate that inflation has positive

and significant influence on economic growth of Jordan, and that structural breakpoint effect

occurs at an inflation rate of 2%. Above the threshold level of 2%, inflation affects economic

growth negatively.

Mohanty, Chakraborty, Das & John (2011) studied the nexus between inflation and growth in

India using quarterly data series and found that the inflation rate of 4% to 5.5% can be

considered as an inflation threshold in the economy. Hence, the study concluded that inflation

rate less than 5.5% would have positive impact on Indian economic growth, while inflation rate

above 5.5% threshold level will have negative impact on the economy.
Fakhri (2011) investigated the possibility of threshold effect of inflation on economic growth in

Azerbaijani economy from 2000 to 2009. The estimated threshold model indicates that threshold

level of inflation for GDP growth in Azerbaijan is 13%. Thus, below this threshold level,

inflation will have significant and positive effect on GDP growth, while a threshold level above

13% will have negative effect on the growth of Azerbaijan. More 4 , Faraji & Kenani (2013)

investigated the impact of inflation on economic growth in Tanzania from 1990 to 2011 using

co-integration approach, ordinary least square (OLS) technique and correlation coefficient

analysis. The results of the co-integration test indicate that, there is no co-integration between

inflation and economic growth. Similarly, the results of the correlation coefficient indicate that

strong relationship exist between inflation and Gross Domestic Product (GDP) in Tanzania. The

results also showed that inflation has a negative impact on economic growth in Tanzania.

Quartey (2010) investigated the impact of inflation in Ghanaian economy from 1970 to 2006 by

using the Johansen co-integration method. The study found negative impact of inflation on the

growth of Ghana. Marbuah (2010) investigated the relationship between inflation and economic

growth in the Ghana’s economy for the period 1955-2009. The study found evidence of

significant threshold effect of inflation on economic growth with and without structural break.

The evidence indicated both a minimum and maximum inflation threshold levels of 6% and

10%. Moreover, the study found that adjusting for structural break in the model increases the

effect of inflation on growth at a robust threshold level of 10% by a factor of approximately

81%.

Omoke (2010) investigated the impact of inflation on economic growth in Nigeria for the period

1970 to 2005, using co-integration and Granger causality tests. Consumer price index (CPI) was

used as a proxy for inflation and the GDP as a perfect proxy for economic growth to examine
the relationship. A stationarity test was carried out using the Augmented Dickey-Fuller test

(ADF) and Phillip-Perron test (PP), and stationarity was found at first difference. More so,

Johansen-Juselius cointegration technique employed in the study showed no evidence of

cointegration between inflation and economic growth in Nigeria. The VAR-Granger causality

employed in the investigation indicated unidirectional relationship between inflation and

economic growth, with causality running from inflation to economic growth in the economy.

Sani & Abdullahi (2011) utilized a quarterly time series data for the period 1981-2009 to

estimate a threshold level of inflation for Nigeria. The study used a threshold regression model

developed by Khan and Senhadji (2001), and found a threshold inflation level of 13% for

Nigeria. Below the threshold level, inflation will have positive effect on economic growth, and

therefore, has negative effect on the growth when the threshold level exceeds 13%. The negative

and significant relationship between inflation and economic growth for inflation rates both

below and above the threshold levels is robust with respect to changes in econometric

methodology.

Odusanya & Atanda (2010) investigate the dynamic and simultaneous inter-relationship between

inflation and its determinants in Nigeria between 1970 and 2007. Using the Augmented Engle-

Granger (AEG) co-integration test and Error Correction Mechanism (ECM) model, the result

showed inflation rate exerts a positive effect on the change in the inflation rate, while a change in

GDP growth rate, real share of import and preceding rate of inflation rate significantly affects

change in inflation rate in the short-run. Also, changes in the real share of fiscal deficit, exchange

rate and interest rate negatively contribute to change in the inflation rate. Therefore, the study

suggested that the money supply's growth should always be kept in check, given its long-run

potential and the magnitude of exerting inflationary pressure on the economy. They also
recommended that appropriate steps that will moderate the expansion of the money supply

should be devised to ensure a stable non-accelerating price level in the economy.

Anidiobu et al. (2018) determine the influence of inflation on the economic growth of Nigeria us

descriptive and ordinary least squares was adopted to analyze data on inflation rate, exchange

rate and economic growth for the period 1986–2015. The result indicates that inflation rate

depicts an insignificant positive relationship with economic growth, exchange rate shows a

significant relationship with economic growth, while there is a negative insignificant relationship

between interest rate and economic growth of Nigeria.

Idris and Suleiman (2019) investigate the influence of inflation on economic growth of Nigeria

from 1980 to 2017. The study employs vector error correction method on variables selected,

which are gross domestic product, inflation rate, interest rate, and exchange rate in the country.

The result revealed that there is long run relationship between the variables, and inflation rate

and interest rate affect the economic growth of Nigeria significantly and negatively in the long

run.

Phillips (1958) developed hypothesizes, which revealed that high inflation in an economy affect

growth of the domestic economy positively by decreasing the rate of unemployment. Similarly,

Prasanna & Gopakumar (2010) argued that nations with high inflation experience a decrease in

the rate of economic growth; hence, inflation affects economic growth negatively. Kilindo

(1997) stated that high inflation, low domestic savings, balance of payments deficits, low

agricultural produce, increase in public spending and fall in industrial capacity utilization

hinders economic growth of a nation. Fischer (1993) was of the opinion that uncertainty in

inflation is the major economic instability indicator, which affects economic growth of a country
negatively. However, Dotsey & Sarte (2000) postulated that fluctuations results to economic

growth via a precautionary savings motive.

According to Awogbemi & Taiwo (2012), persistent rise in the price level of goods and

services are the most serious challenges facing every economic unit. In view of this, every

nation strives to achieve price stability as the main factor that is required to promote economic

growth and development of a nation. They identified some variable determinants of inflation to

include monetary policy, fiscal policy and balance of payments position of a country. In their

explanation of the monetary policy as one of the determinants of inflation, they argued that

inflation results due to increase in money supply. The fiscal policy according to the authors

related to fundamental factors that causes inflation in an economy. They argued that fiscal policy

involves government budget deficit, which are often financed through money creation in the less

developed countries, and hence, fuels inflation. On the other hand, balance of payment position

was based on the rate of exchange. If exchange rate collapses, it will bring about inflation that

may either be inform of higher import prices or in the form of accelerated wage bill

(Akinbobola, 2012).

Osuala, Osuala & Onyeike (2013) investigated the impact of inflation on economic

growth in Nigeria from 1970 to 2011 using Augmented Dickey-Fuller (ADF) and Philip-Perron

(PP) tests, Granger causality test in the analysis. The variables used in the study include real

gross domestic product (GDP) and inflation rate. The results showed that bi-directional

relationship exists between inflation and economic growth in Nigeria. More so, Umaru &

Zubairu (2012) studied the impact of inflation on economic growth and development in Nigeria

between 1970 and 2010 through the applications of Augmented Dickey-Fuller (ADF) technique

and Granger causality test. The empirical results indicated that all the variables were stationary
at first difference; and the results of causality showed that GDP granger causes inflation.

Inyiama (2013) examined the nexus between inflation rate and economic growth in Nigeria for

the period 1979-2010 by using Johansen-Juselius counteraction technique, ordinary least squares

(OLS) approach, Granger causality technique. The empirical results indicated that inflation rate

has negative relationship with real gross domestic product, while exchange rates and interest

rates have positive and insignificant relationship with inflation rate in the economy. The results

of the Granger causality revealed that causality does not run between inflation rate and real gross

domestic product in the economy. However, unidirectional causality runs from exchange rate to

real gross domestic product.

Aminu, Manu & Salihu (2013) investigated the impact of unemployment and inflation on

economic growth in Nigeria from 1986 to 2010 by employing Augmented Dickey-Fuller (ADF)

approach, Johansen cointegration test and Granger causality test. The results of the stationary

test showed that all the variables were stationary at first difference. The results of the Johansen

cointegration test indicate long run relationship among economic growth, unemployment and

inflation. The results of the Granger causality showed that unemployment and inflation granger

cause RGDP in the economy. Aminu & Anono (2012) investigated the effect of inflation on

economic growth and development in Nigeria using Augmented Dickey Fuller (ADF) test,

Ordinary Least Square (OLS) technique and Granger causality test from 1986 to 2011. The

empirical result showed positive correlation between inflation and economic growth in Nigeria.

The results also revealed that the coefficient of inflation is not statistically significant, but it is

consistent with the theoretical expectation. The result of the granger causality test indicates that

causality runs from GDP to inflation, which implies that inflation does not Granger causes GDP,

but GDP granger causes inflation in the economy.

Ozurumba (2012) examined the causal relationship existing between inflation and fiscal deficits

in Nigeria from 1970 to 2009 by employing autoregressive distributed lag (ARDL) model and

the Granger causality test. The result of the Granger causality test indicates that fiscal

deficit/GDP granger causes inflation. The results of the ARDL test showed that fiscal

deficit/GDP has significant and negative relationship with inflation in the economy.

Muhammad, Hazoor & Naeem (2014) investigated the relationship among economic growth,

savings and inflation; and as well estimated the threshold level of inflation for Pakistani

economy. Simultaneous equation model was utilized in the study. The variables used in the

study include GDP growth rate, inflation rate, savings rate, depreciation of exchange rate, total

debt servicing, interest rate, unemployment rate and indirect taxes. Three equations were

employed including 2SLS technique; OLS model was used for investigating the suitable rate of

inflation for the economic growth. Inflation, savings and economic growth were endogenous

variables while unemployment, depreciation rate, foreign direct investment, total debt servicing,

real interest rate, indirect taxes, total investment, dependency ratio were exogenous variables.

The results of 2SLS showed that inflation and real interest rate negatively and significantly

affect economic growth, whereas economic growth, unemployment and real interest rate

negatively affect inflation rate. More so, indirect taxes had positive impact on inflation. The

results also showed that economic growth, dependency ratio and foreign direct investment were

beneficial for enhancing the savings of a country, while depreciation rate is harmful for savings.

Najid & Uma-Tul (2012) examined the relationship between inflation and gross domestic

product in Pakistan for the period 1971-2011. Granger Causality test and Ordinary Least Square

(OLS) method were employed in the analysis. The variables used in the investigation include

gross domestic product (GDP) as the dependent variable, whereas the independent variable was
inflation rate (INFR). The empirical results of the Granger causality test showed that GDP

causes inflation. The results of OLS revealed that positive relationship exist between inflation

and economic growth in Pakistan. Muhammad, Imran & Fatima (2011) studied the impact of

inflation on GDP in the economy of Pakistan from 1972 to 2010, using ordinary least square

(OLS) technique. The variables used in the investigation include gross domestic product (GDP)

growth rate used as dependent variable; whereas consumer price index (CPI) proxied for

inflation, trade openness (OPNS) and investment growth rate (INVG) were used as the

independent variables. The results showed that inflation has negative and significant impact on

the growth of Pakistani economy. Ezeanyeji & Ugochukwu (2015) investigated the effect of

inflation on economic growth in Nigeria from 1991 to 2013 using Ordinary Least Square (OLS)

method of simple regression model. The variables used in the investigation include gross

domestic product (GDP) as the dependent variable, whereas inflation rate (INF) is the

independent variable. The results showed that inflation has negative impact on economic growth

in Nigeria.

The study reviewed wide range of empirical studies on the impact of inflation on economic

growth across the countries of the world. In spite of the several empirical studies conducted on

the subject matter, the studies on the subject matter in Nigeria are scanty, and showed existence

of contradictory findings in the economy, which motivated the research study on the subject.

Awogbemi & Ajao (2011) also argued that increase in the cost of goods and services are often

considered to be counterproductive, and it has negative effect on an economy of a nation. The

most significant influence of inflation is its effect on the public revenue. If the inflation is higher

than the past planned, the revenue of the government decreases. Kevin & Liu (2004) stated that

inflation stability and output gap have been the major objectives for many central banks all over
the world. The main objective of any central bank is to achieve optimal monetary policy rules.

In both policy practice and academic research, inflation target being explicit or implicit is almost

measured through the standard of living index, the consumer price index, the cost of production

index and the producer price index. It was argued that most countries that have adopted an

explicit inflation targeting policy targets inflation or its variants than those that are not.

Frimpong & Oteng-Abayie (2010) examined the threshold effect of inflation on economic

growth in Ghana for the period 1960-2008 by using threshold regression models. The result

shows an inflation threshold level of 11% at which inflation begins to have adverse effect on

economic growth in Ghana. Below the threshold level of 11%, inflation will affect economic

growth positively, while above the threshold level of 11%, inflation will have adverse effect

economic growth in Ghana.

Faraji & Kenani (2013) investigated the impact of inflation on economic growth in Tanzania

from 1990 to 2011 through the applications of co integration approach, ordinary least square

(OLS) technique and correlation coefficient analysis. The results of the co integration test

indicate no co integration between inflation and economic growth. Similarly, the results of the

correlation coefficient indicate that strong relationship exist between inflation and gross

domestic product (GDP) in Tanzania. The results also showed that inflation has a negative

impact on economics growth in Tanzania.

 CHAPTER THREE

METHODOLOGY, TOOLS AND DATA PRESENTATION

3.1 INTRODUCTION

In an attempt to explain the effect of Inflation rate and exchange rate Naira to us dollar on

economic in Nigeria the Gross Domestic Product (GDP) growth of Nigeria, the methodology

used is of great importance, since it determines to a large extent how valid and reliable the

research findings are.

After formulation of the problem in a statistical investigation, it becomes necessary to collect

required data. Although frequently, it is necessary to collect data, it may be possible to find a

portion of data or perhaps all of them in some published from. Where an investigation uses a

published data, the data is said to be Secondary Data and when the investigation or researcher

obtain data directly from respondents such data is called primary data.

This chapter therefore explains however the data used for the project work was collected, the

extent to which the data is valid and to acquaint users or readers with the basic statistical

concepts and tools used.

3.2 DATA COLLECTION METHOD

This study was carried out with the use of secondary data. The data was downloaded from the

website of central bank of Nigeria, a publication of the research department of Central bank of

Nigeria titled “statistical bulletin: Nigerian major Economic, Financial and Banking Sector

indicators” and “Nigerian economic growth drivers and financial challenges” being a paper

delivered by the Governor of Central Bank of Nigeria, Mr. Godwin Emefiele.

3.2.1 QUALITY OF DATA

The researcher of this project has no control over the validity and reliability of the data used

since it was obtained from an already existing source. However, considering the nature of the

data (economic data) and the role they play in knowing the economic status of a nation, it is

believed that they have been properly scrutinized by the Central bank of Nigeria to get maximum

reliability and validity.

3.3 METHOD OF DATA ANALYSIS

The statistical tools used for the research work are pearson's rank correlation and

Multiple Regression Analysis: used to fit the regression model

ANOVA: Was used to test the significant of the model, While t-test was used to test if the

estimated regression coefficient (  1 ,&  2 ,) have any significant effect on the GDP growth.

3.3.1 REGRESSION ANALYSIS

Regression analysis is a statistical tool for the investigation of relationships between dependent

variable and Independents variables. Usually, the investigation seeks to ascertain the causal

effect of one variable upon another. For example, the effects of price increase upon demand, or

the effect of changes in the money supply upon the inflation rate. To explore such issues the

investigator assembles data on the underlying variables of interest and employs regression to

estimate the quantity effect of the causal variable that they influence.

The investigator also typically assesses the “Statistical Significance” of the estimated

relationships, that is, the degree of confidence that the true relationship is close to this estimated

relationship. Regression technique has long been central to the field of economic statistics

(“Economist”). Investigations in which the relationship between a single regressor or explanatory

variable X and a response of dependent variable Y is of interest is called a simple linear

 regression. If however, the interest of the investigator is a single dependent variable Y that

depends on K independent variable for example X 1 X 2 … X k , then we talk of a multiple linear

regression.

Regression analysis was first developed by Sir Francis Galton in the latter part of the 19 th

century. Galton developed a mathematical description of the regression model. Regression

analysis serves three major purposes which are description, control and prediction.

3.3.2 MULTIPLE LINEAR REGRESSION

Many regression problems involve more than one explanatory variable. The general purpose of

multiple regressions is to learn more about the relationship between several independent or

predictor variables and a dependent variable. The prediction equation is obtained by using the

least square procedure to evaluate the necessary coefficient in the assumed equation. We

assumed the theoretical equation of the form of equation 3.1.

yi= β0 + β1xi1 + β2xi2 + … + βkxik+ ei 3.1

Where,

β0 is the regression constant

β1 is the regression coefficient for variable X1

βk is the regression coefficient for variable Xk

k is the number of independent variables.

is the residual (error term).

Assumptions about the error term are as follows;

They are independent.

Have mean of zero and a constant variance of σ 2 for any set.

 X 1 X 2 … X k , and

Are normally distributed

When the assumptions about €o meet, the average value y for a given set of values X 1 X 2 … X k ,,

is equal to the deterministic part of the model;

3.3.3 MATRIX APPROACH TO ESTIMATE MULTIPLE LINEAR REGRESSION

COEFFICIENTS

In fitting a multiple linear regression model, it is much more convenient to express the

mathematical operations using matrix notation. Suppose that there are k regresses variables and n

observations, (xi1, xi2, … ,xik,yi), i = 1, 2, … , n and that the model relating the regresses to the

response is as shown in equation 3.2.

yi= β0 + β1xi1 + β2xi2 + … + βkxik+ ei; i = 1,2, … , n 3.2

This model is a system of n equations that can be expressed in matrix notation as

y = Xβ + e 3.3

where=

y  
 1 1
 x 11 x 12
 x 1k

  0  1 
 
y  1 x x  x    
21 22 2k 
y = 2 X = β 1 and e=  2 
         
   
  1  
 yn   x n1 x n2
 xnk   k
 
 n 

In general, y is an (n x 1) vector of the observations, X is an (n x k) matrix of the levels of the

independent variables, β is a (k x 1) vector of the regression coefficients, and e is an (n x 1)

vector of random errors.

The aim is to find the vector of least squares estimators, β, that minimizes

n
L =   = (y – Xβ)(y – Xβ)
2
3.4
i 1

The least squares estimator is the solution for β in the equations

However, the resulting equations that must be solved are

 n n

 n x1i x 2i 
 i1 i1

 n n n

 x1i x 
2
XXI= 1i x1i x2i  3.5
 i1 i1 i1 
 n n n 
  x2i x x
1i 2i  x22i 
 i1 i 1 i1 

To solve the normal equations multiply both sides by the inverse of XX. Therefore, the least

squares estimate of β is

 
 0
 
(XX)-1XY=  1  3.6
 
 
 k

Note that there are p = k + 1 normal equations in p = k + 1 unknowns (the values of β 0, β1,

… ,βk).For instance, if we have two predictors (i.e. k = 2), we will have three equations in three

unknowns (β0, β1,β2). The procedures are as follows:

1
 x
11 x 

21

The matrix of the predictor variables is:

1
X =
x
12 x22 
  
 
1
 x
1n x2n 
 y
 1
y 
The vector of dependent variable is: y=  2 
 
 
 yn 

 n n

 n x1i x 2i 
 i1 i1

 n n n

Then the design matrix is: X'X=  x1i x 
2
1i x1i x2i 
 i1 i1 i1 
 n n n
2 
  x2i x x
1i 2i  x2i 
 i1 i1 i1 

 n 
  yi 
 i 1 
 n 
The vector of observations is: XY =   x1iyi 
 in1 
 x 2iyi 
 
 i 1 

Then the vector of parameters is defined as in equation 3.7.

 
 0
(X'X) XY =   1 
-1
3.7
 
 
 2

3.3.4 ANOVA IN MULTIPLE LINEAR REGRESSIONS

The ANOVA in multiple linear regressions is interested in analyzing the variation in dependent

variable Y into its component parts; one part due to relationship with X1, X2, …, Xk and the other

parts due to error. The general form of the ANOVA table for a multiple regression is shown in

table 3.1.

Table 3.1 Analysis of Variance for Testing Significance of Regression in Multiple Regression
Source ofSums of squares Degrees ofMean squares F

variation freedom

n
yi2
Regression SSR= β(XY) –  k MSR= F=
i1 n

SSE= YY– β(XY)

n–k–1 MSE=

Error

Total 2
n–1
SST= YY – 
n yi
i 1 n

The ANOVA is usually applied in multiple regression analysis to test for the significance of all

the regression coefficients.

Hypothesis

H0: βi – βj=0 (for all i and j)

H1: βi – βj≠ 0(for some i ≠ j) Test Statistic

F=
 Decision Criterion

Reject H0if F> Fα.k,n-k-1 for α level of significance; where k is the number of explanatory variables

in the model.

PEARSON'S RANK CORRELATION

The pearson's rank coefficient of correlation is a nonparametric measure of Correlation

(statistical dependence of ranking between two variables. Named after pearson's, it is often

denoted by the Greek letter ‘ᵨ’ and is primarily in statistics, pearson’s rank correlation

coefficient or pearson’s. Named a nonparametric measure of rank correlation (statistical

dependence between used for data analysis named Charles pearson's and of tern denoted by

the Greek letterhead) O d Dependence between The rankings of two variables). It assesses how

well the relationship between two Variables ‘can be described using a monotonic fuscous The

pearson's correlation between two variables 1s equal to the Pearson Correlation between the

rank alias of those two variables; while Faeroes Assesses relationships,pearson's correlation

assesses Correlation Linear Correlation Assesses 19Onotonic relationships (whether 1inear or

not). If there are no repeated data values, a perfect pearson's correlation of +1 or-! Occurs

when each to the variables 1s a perfect monotone function of the other.

And also the sing of the pearson's correlation indicates the direction of association between X

(the independent variable) and Y (the dependent variables).If Y tends to increase when X

increases, the pearson's correlation coefficient is positive .If Y tends decrease when X increase,

the pearman correlation coefficient is negative. A pearson's correlation of zero indicates that

there is no tendency for Y to either increase or decrease when X increases. The spearman
correlation increases in magnitude as X and Y become close to being perfectly monotone

functions of each other. When X and Y are perfectly monotonically related , the pearson's

correlation coefficient becomes 1.A perfectly monotone increasing relationship implies that for

any two pairs of data values X;,Y and X;,Y;, that X;-X ;and Y;-Y; always have the same sign.

The pearson correlation coefficient is often descried as being ‘’nonparametric ’ ’this can have

two meanings. First, a perfect pearson'socorrelation result X and Y are related any monotonic

function

POSITIVE PEARSON'S CORRALATION ;When small value of x relate to small value of y and large

value of x relate with less value of x and also s appositive pearson's correlation coefficient

corresponds to an increasing monotonic trend between X and Y.

NEGATIVE PEARSONS CORRELATION ;Associate with small when the small value of x associate

with larger value of associate with small Value of and also a negative pearson's correlation

coefficient corresponds to an increasing monotonic trend between X and Y

HYPOTHESIS

H0: there is no significant difference between the economic growth and inflation rate

H1: there is significant difference between the economic growth and inflation rate
H0: there is no linear relationship between economic growth and inflation rateH1: there is linear

relationship between economic growth and inflation rate

CHAPTER FOUR

DATA PRESENTATION
Years Exchange rate Inflation rate Economic growth

2000 85.95 7.93 1000.21

85.95 10.33 1370.31

82.43 14.57 930.56

90.3 22.9 1539.89

2001 70.16 15.74 1144.13

1010.48 17.72 956.13

436.01 19.58 1612.14

108.66 15.1 1312.14

2002 106.4 17.32 1954.27

111.85 17.93 1654.27

112.79 17.01 2308

136.02 5.22 1900.54

2003 129.43 7.93 2091.21

131.28 10.33 1792.15

129.88 14.57 2991.27

 132.59 22.9 1991.2

2004 128.89 23.23 2222.14

128.88 17.13 1440.15

129.53 10.93 3204.14

130.99 10.23 2022.14

2005 134.49 10.23 2758.35

135.46 12.33 2901.05

134.78 17.77 3310.9

131.01 26.2 1546.69

2006 129.79 15.1 5555.62

130.46 11.17 2554.99

130.92 10.53 2806.24

128.36 4.33 2305.62

2007 123.79 7.47 2739.63

120.71 6.77 2739.62

121.98 5.07 2739.62

 120.09 4.33 3539.62

2008 118.1 7.47 1939.62

119.14 8.13 2739.61

120.53 9.97 2911.34

118.48 13.13 2001.17

2009 145.15 14.87 3000.59

154.14 14.33 2372.58

161.87 12.57 3893.58

166.32 10.83 3164.58

2010 150.06 12.67 2594.76

151.62 14.94 2873.38

152.5 14 4000.03

150.26 13.43 3580.73

2011 153.58 12.67 2653.86

152.87 12 2955.29

155.05 11.3 4130.57

 161.29 9.67 3689.65

2012 158.82 10.37 2805.8

159.87 12.2 3160.09

158.73 12.83 4309.97

154.88 11.3 4055.84

2013 158.73 11.93 2874.85

159.44 12 3241.85

161.15 9.03 3241.18

159.34 8.83 4456.11

2014 160.96 8.3 4178.39

162.07 7.9 3033.97

162.8 7.83 3360.45

172.67 8.03 4655.32

2015 196.48 8.37 4330.65

198.98 8 3176.6

198.03 8.36 3577.85

 199.05 8.97 4816.52

2016 199.13 9.3 4481.26

226.63 9.14 3274.73

. 254.19 3.75 3635.53

311.15 15.26 5035.07

2017 311.99 17.53 4667.01

314.88 18.45 3385.6

342.33 17.92 3745.09

362.43 16.53 5189.37

2018 360.31 16.01 4859.44

360.02 15.74 3487.31

361.79 14.94 3789.72

364.16 11.77 4978.78

2019 361.61 11.22 3597.92

359.91 11.33 3857.71

367.07 11.31 5408.98

 1448.62 11.11 5093.98

2020 363.04 12.19 3677.15

362.59 12.43 3918.67

411.15 13.25 5484.06

410.72 16.29 5268.29

2021 394.63 17.32 3760.88

400.87 17.93 3580.73

411.15 17.01 3653.86

410.72 5.22 2955.39

ANALYSIS AND DISCUSSION OF RESULTS

4.1. Introduction

This chapter involves data analysis and discussion of the results obtained using SPSS package.

The chapter is divided into four parts, exploratory analysis followed by the three aims and

objectives started earlier. The first phase is the exploratory analysis, the second phase is to

develop regression model and test for its significance, and test for the significance of each of the

parameters in the model. Interpretation of each of the analysis is also done for all the statistical

tools employed and it is based on this interpretation that conclusions will be drawn and relevant

recommendations preferred.
 4.3. Developing Multiple Regression Model

Before we develop the model, we first conduct correlation analysis to establish the relationships

that exist between the three variables

4.3.1.Testing Relationship between Variables in the Model

We use the correlation matrix or correlation table to show the relationships that exist between the

variables. The variables in question are exchange rate, inflation rate and economic growth. The

correlations between them lead us to generate table 4.3.

Table 4.1 Pearson’s Correlation Result between economic growth and exchange rate

ECONGROWTH EXCHRATE

ECONGROWTH Pearson Correlation 1 ,317**

Sig. (2-tailed) ,002

N 91 91

EXCHRATE Pearson Correlation ,317** 1

Sig. (2-tailed) ,002

N 91 91

From table 4.1, the result shows that the value of correlation coefficient is 0.317, indicates that

there is weak positive relationship between exchange rate and economic growth.

Table 4.2 Pearson’s Correlation Result between economic growth and inflation rate
 ECONGROWTH INFRATE

ECONGROWTH Pearson Correlation 1 -,102

Sig. (2-tailed) ,338

N 91 91

INFRATE Pearson Correlation -,102 1

Sig. (2-tailed) ,338

N 91 91

From table 4.2, the result shows that the value of correlation coefficient is -0.102, this indicates

that there is weak negative linear relationship between inflation rate and economic growth.

4.3.1 Fitting a Multiple Regression Model

Let

Y = economic growth

= exchange rate

= inflation rate

From the SPSS result/ output

After necessary computations table 4.4 was obtain for multiple regression purposes as follows.

Table 4.3: Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate

1 ,354a ,125 ,105 1143,34393

a. Predictors: (Constant), INFRATE, EXCHRATE

Interpretation

The result in table4.3 indicates that the Adjusted R2 is only 10.5% , that is only 10.5% variation

that economic growth in Nigeria will jointly explained by changes or variation in the inflation

rate and exchange rate while the remaining 89.5% is due to other rate not considered or not

added to the model

Adjusted R2

4.3.2 Test for Significance of Regression Model

Hypothesis

(none of the explanatory variables contribute significantly to the fitted model)

(at least one of the explanatory variables contribute significantly to the fitted model)

Level of significance

= 0.05

Test statistic

Fc =

Decision criteria

Reject H0 if p-value<0.05

The Analysis of variance is carried out in table 4.4as follows

Table 4.4Analysis of variance for testing Significance of Regression model

Model Sum of Squares Df Mean Square F Sig.

1 Regression 1,647E7 2 8232749,125 6,298 ,003a

Residual 1,150E8 88 1307235,340

Total 1,315E8 90

a. Predictors: (Constant), INFRATE, EXCHRATE

b. Dependent Variable: ECONGROWTH

From table4.4 shows that p-value = 0.003<0.05, we reject H0 and conclude that the model is

significantly fit, that is at least one of the regress or variables contributes significantly to the

model.

4.3.4 Test for Individual Significance of the Coefficients

Hypothesis

Level of Significance

= 0.05

Decision Rule

Reject H0 if p-value<0.05

Test for Significance Of

Hypothesis
 Test for Individual Significance of the Coefficients
cc

Hypothesis

Level of Significance

= 0.05

Decision Rule

Reject H0 if p-value<0.05

Test for Significance Of

Level of Significance

= 0.05

Conclusion

With p-value = 0.000>0.05, we reject H0 and therefore conclude that Test for Individual

Significance of the Coefficients

Hypothesis

Level of Significance
 = 0.05

Decision Rule

Reject H0 if p-value<0.05

4.2.3.2 TEST FOR SIGNIFICANCE OF

Level of Significance

= 0.05

Conclusion

With p-value = 0.01<0.05, we reject H0 and therefore conclude that β0≠0

Significance of .

Hypothesis

Level of Significance

= 0.05

Table 4.3 : Regression coefficients

 Standardized

Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 3231,771 357,839 9,031 ,000

EXCHRATE 2,204 ,648 ,344 3,400 ,001

INFRATE -42,601 26,917 -,160 -1,583 ,117

a. Dependent Variable: ECONGROWTH

From table4.5 the results indicate that the intercept of the model is 3231.77, the co-efficient of

exchange rate is 2.204 which indicates that it is contributing to the economic growth positively

while inflation rate has -42.601 which will contributed to economic growth negatively in the

model. The model can be expressed as in equation below:yi= β0 + β1xi1 + β2xi2

= 3231,771+ 2,204 -42,601

From table 4.5, the p-value of exchange rate is 0.01which is <0.05, we reject H 0 and conclude

that that is it contribute to the Nigerian economic growth, while for inflation rate the p-

value is 0.117 which is greater than 0.05, we failed to reject H0 and conclude X2 which shows

that inflation rate in insignificant in the model which mean that that it is not contributing

anything to the economic growth.

From the individual test of the coefficient of the model based on the data for the period under

consideration, it was fond out that both inflation rate fail to contribute but exchange rate

contributes significantly to GDP growth rate in Nigeria.

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary

This research study has provided evidence that there exist a significant relationship between

inflation rate , exchange rate and economics growths, a regression model was fitted that could be

used to estimate or predict the Gross Domestic Product (GDP) growth rate in Nigeria, that is =

3231,771+ 2,204 -42,601 From the ANOVA test of joint significance of (that is

inflation and economic growth) it was established that at least one of the explanatory variable

contribute significantly to the fitted model and t - test of individual significance confirms that

both inflation & exchange rate contribute significantly to the fitted model. Also, the coefficient

of multiple determination reveals that 94% of the variation in GDP growth is jointly explained

by exchange rate and inflation rate and the test for multicollinearity shows that the two

explanatory variable are not collinear which further validates the reliability of the model.

5.2 Conclusions

Based on the objectives of the study, and its significance, we make the following conclusions;
 Under the assumptions of model, the model fitted is reliable and can be used to predict future

values of GDP growth.

 The exchange rate contributes more than inflation to the GDP growth in Nigeria since it has a

standard coefficient (Beta) of 2,204 against that of the exchange rate that is -42,601.

 The inflation is a major player in economic policy formulation in Nigeria.

5.3 Recommendation

Based on the analysis carried out and the various test carried out on the parameters and some

assumptions of the model, the conclusions and the findings, it is therefore recommended that;

 The fitted model can be used to predict the GDP growth in Nigeria using figures gotten

for inflation rate and economic growth and the predicted values can be used to check the

validity of the figures gotten from the conventional methods used for estimating the

GDP growth.

 Economic policy should be designed in such a manner that Government intervenes in the

market with exchange rate reserves (for domestic refining) to keep prices of refined

market product within the bands that will enhance growth of the domestic economy.

 Measures should be put in place to increase the economic growth contribution to the

GDP since all other rate of the economy will be benefited from it.

 Other rate of the economy such as manufacturing, real estate etc should be given more

attention. This will be a form of diversification of the economy of the country.

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48