AN ANALYSIS OF THE LINKAGE BETWEEN INFLATION, SAVINGS AND OUTPUT IN NIGERIA IN NIGERIA

Abstract

The linkage dynamics of inflation, savings, and output forms the bedrock of this work. This study anchored on three models to explain; the effects of inflation and savings on economic output, how economic growth responds to changes in inflation and savings in Nigeria and the causal relationship between inflation, savings and output. Time series data were collated for the variables selected for the analysis while, Ordinary Least Square (OLS) was used for the first and second objectives, Granger causality method was used for the third. The OLS results for the first and second objectives reveal that saving stimulates output, while a sustained high inflation rate is detrimental to output. On the other hand, domestic savings through a leakage in the short run plays a major role in the long run by providing the needed cheap funds for investment purposes that engender an increase in output and also curb excess cash in circulation that tames high inflation. The causality model for the first objective reveals that real Gross Domestic Product (rGDP) granger causes Gross Domestic Savings (GDS). In other words, households and firms save more in a growing economy and a growing economy is characterized by increasing output which tames inflation. It is therefore recommended that government should adopt monetary policies like low cash reserve requirements, removal of charges on savings accounts, removal of outright border closure and provision of saving facilities to households in rural areas to stimulate savings and help keep inflation low with the attendant economic benefits.