Inflation and Nigerian Investment Growth: Engle-Granger Two Step Modeling (EGM) Approach

This study makes a modest contribution to the debates by empirically analyzing the relationship between Nigeria inflation trend and investment growth (gross fixed capital formation), using time series data from 1980 to 2015, obtained from the World Economic Outlook (WEO) database of the IMF and World Development Indicators (World Data Bank Online Version). It employs the Engle-Granger two step modeling (EGM) procedure to co-integration based on unrestricted Error Correction Model and Pair wise Granger Causality tests. From the analysis, my findings indicate that inflation and gross fixed capital formation are cointegrated in this study. The error correction term of -0.76 is negatively signed and also significant at all conventional level indicating that when the variables wonder away from equilibrium following an exogenous shock, 76 percent of the disequilibrium is corrected after one year. Based on the result of granger causality, the paper concludes that causality exist between the two variables used in this study. Therefore, the policy implication of these findings is that government should adopt various policy measures (both monetary and fiscal) to reduce inflation to an acceptable level because the current inflationary trend in Nigeria is negatively affecting the realization of creativity and manufacturing of commodities with international competitive advantage.