Modelling dynamics of inflation in Nigeria

Abstract

Abstract. The study was motivated by the pervasively increasing inflation rate which has for the past 3 decades embattled and inhibited the potential growth of the Nigeria economy coupled with the fact that empirical studies on modeling the trend and behavior of inflation dynamics have remained largely neglected or scarcely researched. Hence, the pertinent concern of this paper is to model the dynamics of inflationary expectation in Nigeria by applying autoregressive distributed lag (ARDL) cointegration framework, Error Correction model, Ordinary Least Square methods and a host of diagnostic tests on time series (secondary) data, covering 1980 to 2015. While the empirical results expedite a cointegrated and stable long-run relationship between the variable of interests when price level is the dependent variable, money supply, interest rates, fiscal deficit to GDP and international oil price shock are found to be statistically significant in explaining the dynamics of inflation in Nigeria both in the long run and short run. Consequently, the study recommends the need for implementation of strategic diversification policy to reduce the vulnerability of the economy to oil price shock both locally and internationally and also, that the government and policymakers need to swing into urgent action in initiating fiscal policy that will further enhance stabilization of the country’s exchange rate and raise the value of the Naira. Keywords. Exchange rate, Industrialization, Export, Inflation. JEL. L00, L16, F31.