Cointegration and Error Correction Analysis of Inflation and Economic Growth in Nigeria (2000–2025)

Abstract

This study examined the effect of inflation on economic growth in Nigeria from 2000 to 2025 using the Johansen cointegration technique and the Error Correction Model (ECM). Secondary data on inflation, interest rate, exchange rate, and real gross domestic product were obtained from the World Development Indicators (WDI) published by the World Bank and analyzed using the ECM approach. The results reveal that inflation has a negative but statistically insignificant effect on economic growth, with a coefficient of -0.512479 (p = 0.3372). Interest rate shows a negative and statistically significant effect, with a coefficient of -0.950786 (p = 0.0101), indicating that higher borrowing costs reduce economic activity. Similarly, exchange rate has a strong negative and statistically significant effect on economic growth, with a coefficient of -1.968490 (p = 0.0035), implying that exchange rate depreciation significantly reduces output in Nigeria. The findings suggest that exchange rate is the most influential variable affecting economic growth, followed by interest rate, while inflation has a negative but insignificant impact. The Error Correction Term confirms a stable long-run relationship among the variables. The study recommends improved coordination between monetary and fiscal authorities to stabilize exchange rates and manage inflationary pressures for sustainable economic growth.