Household Consumption and Economic Growth in Nigeria

Abstract

This study examined the effect of household consumption expenditure on economic growth in Nigeria, controlling for inflation and interest rate. The study utilized annual secondary time-series data spanning 1986 to 2024, sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, on real Gross Domestic Product, household final consumption expenditure, inflation rate, and interest rate (Monetary Policy Rate). The Augmented Dickey-Fuller unit root test was employed to determine the stationarity properties of the series, followed by the Autoregressive Distributed Lag (ARDL) bounds testing approach to establish the short-run and long-run relationships among the variables, and the pairwise Granger causality test to determine the direction of causality. Diagnostic tests, including tests for normality, serial correlation, heteroscedasticity, model specification (Ramsey RESET), and parameter stability (CUSUM/CUSUMSQ), were also conducted to validate the estimated model. The unit root results showed a mixed order of integration, with inflation stationary at level and the remaining variables stationary at first difference, justifying the ARDL approach. The bounds test confirmed a significant long-run relationship among the variables (F-statistic = 19.404). Household consumption expenditure was found to exert a positive and statistically significant effect on economic growth in both the short run (coefficient = 0.125, p = 0.0001) and the long run (coefficient = 0.907, p = 0.0000), while inflation and interest rate were not statistically significant in the long run. The error correction term was correctly signed and significant (coefficient = −0.216, p = 0.0000), indicating an annual adjustment speed of approximately 21.6% toward long-run equilibrium. Granger causality results revealed a bidirectional relationship between household consumption expenditure and economic growth. The study recommends that government prioritize policies that protect and expand real household purchasing power, including targeted cash transfers and inflation-responsive minimum wage reviews, and that monetary policy be treated as a short-term stabilization tool rather than a substitute for consumption-driven growth strategy, given the transitory nature of inflation’s and interest rate’s effect on growth.