The research study adopted the quantitative study design tobe able to determine the relationship between inflation, interest rates,exchange rates and economic growth also to explain variations between them. Thearea of study is the Nigerian economy and the study sought out to understandthe important correlation between inflation, interest rates, exchange rates andeconomic growth. The study chose to use the sample period 1981-2016 for whichdata is collected analyzed and interpreted. Once the relationship is clarifiedbetween these variables this can assist in policy formulation since the trendsof the variables will be known.
The current study relies on the yearly secondary data. Thesample size to be used is 35years which is from 1981-2016. The data is obtainedfrom the Central Bank of Nigeria (www.cbn.gov.ng).
The data represent two variables independent and dependentwhich are inflation, interest rates, exchange rate and economic growthrespectively. I have chosen Eviews 9 software to estimate the multipleregression model. Also, to emphasize the existence and influence of otherfactors, not considered in this model, we have included the free term C. theestimation of the parameters is based on the least squares method.
The selectedmodel used for this study is as follows:RGDP=?0+ ?1RER+ ?2INTR+ ?3INF + eY:Dependent variable which is the GDP?0: Intercept of the regression modelRER:Real Exchange RateINTR:Interest RateINF:InflationRGDP:Real Gross Domestic Producte: Error term, reflect that this is an estimated model notactual relationship of the variablesThe study was done by using reliable secondary yearly datawhich was not manipulated. Definition of VariablesINFLATION: Inflation is arise in the general level of prices of goods and services in an economy over aperiod of time. There are a few causes of inflation where aggregate demandincreases faster than aggregate supply, therefore increasing the cost of goodsand services. The imbalance of aggregate demand and supply is linked to thegovernment’s deficit, expansion of bank’s interest rates and the increase offoreign demand. Inflation also increases the price of goods and the price ofwork labor thus the cost of goods and selling price increases. Inflation has afew indictors such as Consumer Price Index (CPI), Wholesale Price Index (WPI),and Implicit Price Index (deflator GDP).
GROSS DOMESTIC PRODUCT (GDP): GDPis a good indicator of a country’s microeconomic status and development. GDPcan be seen from two sides such as the expenditure and income approach. Firstwe will look at the expenditure approach. It takes account of all goods andservices within a given time period. A good example will be such as householditems that we buy daily, purchases from a foreign investor and services.
On theother hand, the income approach can be best described as the level of worker’scompensation, rent, interest rates, income of a particular business, tax of aproduced goods and import levelEXCHANGE RATES: in thetheory of economics, exchange rate is a value that a currency has compared toanother currency. Exchange rate can be divided into two categories, fixedexchange rate and flexible exchange rate. In a fixed exchange rate, it is setby the government, whereas flexible exchange rate is set by the market with orwithout the influence of the government.INTEREST RATES: interestrate cane be described as a value that is gained in the effort of a value thathas been saved or invested. These rates will reflect the interaction betweenexchanges of money. There are short term and long term rates. Short term ratesis influenced by the Central Bank, thus money is being monopolized accordingly.In long term rates however, shows the condition of the current economy and thepossibility of inflation.
Both of the rate are linked and work with one another.