INFLATION AND INVESTMENT IN NIGERIA: A NON-LINEAR APPROACH

ABSTRACT

This study inquired into the effect of inflation and investment in Nigeria. The objectives of this research examined the influence of inflation on domestic Investment and Foreign Investment. This study estimated time-series data from 1980 - 2019, using secondary data sourced from the CBN statistical bulletin and world bank world development indicators. The primary objective of this study was to investigate comparatively inflation and investment in Nigeria. The Non-linear autoregressive distributed lag (NARDL) estimation approach was adopted in the study to capture the asymmetry and non-linearity in the relationship between inflation and investment. The study's findings revealed that for the asymmetric impact of inflation on domestic investment, positive inflation (increase in inflation), negative inflation (decrease in inflation), and negative inflation lag significantly affect domestic investment in the short run. In contrast, positive inflation significantly affects domestic investment in the long run. The foreign investment estimation showed that negative inflation, economic growth, exchange rate, and lag of interest rate determined foreign investment quickly. While negative inflation and interest rate determined foreign investment in the long run hence, the decrease in inflation was significant in both the short run and the long run; however, while it was directly related to foreign investment in the short run, it was inversely related to foreign investment in the long run. The Granger causality test showed that domestic investment granger causes economic growth and vice versa; hence a bi-directional causality exists between them. The study recommends that to grow investments, an effective inflationary and exchange rate policy be maintained to attract domestic and foreign investments. Furthermore, Nigeria must continually find pathways to checkmate the rise of inflation if potential domestic and foreign investment is to be attracted. Therefore, a conscious effort should be made to reduce inflation, and when investors see an improvement in inflation rates, they will be encouraged to increase investments.