An Estimation and Assessment of Inflation Threshold for Nigeria 1970-2008

The debate among scholars on inflation and economic growth is one that has taken a long route in the
empirical literature with the issues coming alive in the twenty first century following increasing
movement of monetary authorities in developing and emerging economies towards perfecting inflation
targeting. Motivated by the movement of most developing countries and emerging countries towards
inflation targeting and the concern that high level of inflation is inimical to economic growth, this paper
uses the threshold model developed by Khan and Senhadji (2001) to estimate inflation threshold level
for Nigeria. The study uses annual time series data spread over two periods 1970-2008 and 1980-
2008 to determine the inflation threshold for Nigeria and to establish whether there is significant
change in the threshold level for the two periods. Using a nonlinear inflation-growth model control
variable such as growth in the ratio of broad money supply to GDP (GLM2/GDP) and growth in term
of trade (GLTOT), we established an inflation threshold of 8 percent for Nigeria over the sample
period 1970-2008. For the period 1980-2008 we estimate an inflation threshold of 7 percent although
failing the test of significance. This result is essential for monetary policy formulation given that the
Central Bank of Nigeria has been targeting single digit inflation over the past decades without
necessarily targeting the optimum point in which inflation becomes inimical to growth.