A Co-integration Approach to the Determinants of Inflation in Nigeria

Abstract

This study was a co-integration approach to the determinants of inflation in Nigeria. The study became necessary as a result of the rampaging effect of the increasing rate of inflation in the country particularly immediately after the fiscal crises between 1980 and 1984. The study used secondary data collected from the Central Bank of Nigeria (CBN) statistical bulletin (2012-2018). This was analysed using auto-regressive distributed lag. The findings showed that real and lagged government expenditure, exchange rate, money supply and crude oil price are the main macroeconomic factors responsible for inflation in Nigeria. Whilst exchange rate depreciation helps to reduce the level of inflation, decreases in crude oil prices increase the level of inflation. Also, growth in real government expenditure and money supply exert pressure on price levels to move up. The long run co-integration and bounds results show that there is a long run relationship between inflation and government expenditure. The lagged explanatory variables are significant at 5% level of significance, except crude oil price. It was concluded that inflation in Nigeria is multi-dimensional and dynamic. It was therefore recommended that the government should implement policies that enhance increased production of goods and services leading to reduction in the general prices level and diversify the economic base to control the effect of inflation in Nigeria.