Inflation, Inflation Uncertainty and Output Growth in Nigeria

Inflation, Inflation Uncertainty and Output Growth in Nigeria.

ABSTRACT

Rapid output growth and low inflation are the most common objectives of macroeconomic policy in both developed and developing economies. The relationship between inflation, inflation uncertainty and output growth has attracted much interest in economic literature.

The views on the direction of this relationship are divergent and empirical evidences vary, depending on the economy examined. The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy.

Although Nigeria has adopted various monetary policy routes in order to achieve desired objectives of rapid output growth and low inflation levels, it has still struggled with inflation, uncertainty and output growth.

This study therefore examined the interrelationship between inflation, inflation uncertainty and output growth in Nigeria for the period of 1961 to 2013.

The study employed EGARCH-M (1, 1) modelling and pairwise Granger Causality test to examine the relationship among inflation, inflation uncertainty and output growth.

Estimated results of the study revealed that inflation uncertainty and inflation both have positive and significant impact on themselves. This shows support for both the Friedman-Ball and Cukierman-Meltzer Hypotheses at the same time.

Also, output growth positively and significantly affects inflation. Furthermore, causal tests showed overwhelming support for the Friedman-Ball Hypothesis that inflation causes inflation uncertainty in both short and long run.

The study recommended that the Central Bank of Nigeria should employ proper inflation targeting in its monetary policy.

Also since leverage and asymmetric effects were established, the study recommended that the benefits of keeping inflation low, the major contributory factors and drivers of current inflation must at all times be explained to the general public in order to help rationalize their inflation expectations.

TABLE OF CONTENTS

Cover page ………i
Title page …………ii
Approval ………iii
Certification………….iv
Dedication…………v
Acknowledgement……………vi
Abstract…………….vii
Table of Contents…..viii

CHAPTER ONE: INTRODUCTION

1.1 Background of the study ……….1
1.2 Statement of problem………. ….4
1.3 Research questions ………..6
1.4 Objective of study …………6
1.5 Statement of hypothesis ……..6
1.6 Significance of study ……..7
1.7 Scope of the study …..8

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual framework ……………9
2.2 Theoretical framework …………..11
2.2.1 Theories of inflation and output growth relationship ………………12
2.2.2 Theories of inflation – inflation uncertainty relationship ….19
2.3 Empirical literature ………………21
2.3.1 Foreign studies ……..22
2.3.2 Domestic studies …………..31
2.4 Limitations of previous studies …………32

CHAPTER THREE: METHODOLOGY

3.1 Methodological framework ……..34
3.1.1 Modelling inflation uncertainty …….34
3.2 Model specification …..36
3.3 Model justification and estimation techniques …….38
3.3.1 Statistical criteria (first order tests) …….38
3.3.2 Econometric criteria (second order tests) ………….39
3.4 Data properties and summary ……………………40
3.5 Data source / econometric software …………………..40

CHAPTER FOUR: RESULTS AND INTERPRETATION

4.1 Analysis of the time series structure………..41
4.1.1 Descriptive analysis of the variables…………..42
4.1.2 Unit root analysis of the time series……42
4.1.3 Johansen Cointegration test……………43
4.2 Discussion of EGARCH regression estimates……45
4.3 Discussion of Granger Causality test results…….47
4.4 Presentation of residual diagnostics…..49
4.4.1 Test for Serial correlation………..50
4.4.2 Heteroscedasticity tests…..51
4.5 Evaluation of the research hypotheses…..52

CHAPTER FIVE: SUMMARY, RECOMMENDATIONS & CONCLUSION

5.1 Summary of findings………..54
5.2 Recommendation………55
5.3 Conclusion……….56
5.4 Limitations of this study…………57
5.5 Suggestions for further studies……58
REFERENCES …….59
APPENDIX

INTRODUCTION

1.1 Background of the study

The prominent issues in the field of macroeconomics border on the trilogy of unemployment, output growth and inflation. According to Dornbusch and Fischer (1992), as far as the topic of inflation is concerned, the policy issue is how to keep inflation low; and if it is high, how to reduce it without causing a recession.

Mankiw (1997) explains the term inflation as “the overall increase in prices”. It is a fact that the problem of inflation is one that is being battled by all economies both developed and less developed although a larger brunt of its impact is felt more by less developed economies (Orji, Ugbe and Ifeanyi , 2015)

Macroeconomists and monetary policy advisors world over are convinced that more unstable prices are potentially damaging to the growth of any economy. This conviction is driven by the apperceive hypothesis advanced by Milton Friedman (1977).

Friedman’s hypothesis has been approached from two angles. The first looks at the interrelationship between the inflation rate and inflation uncertainty and the latter presents an extension of the former relationship by looking at the link between inflation uncertainty and output growth (Hachicha and Lean, 2013).

Friedman particularly argued that rising inflation was associated with a higher level of inflation uncertainty and this uncertainty was detrimental to growth because it rendered market price system less efficient for coordinating economic activity causing difficulty on the path of economic agents in terms of deciding how to use resources (Ndoricimpa, 2014).

REFERENCES

Alexander, C. (2009). Pratical financial econometrics. John Wiley & Sons, Ltd.

Apergis, N., (2004). “Inflation, Output Growth, Volatility and Causality: Evidence from Panel Data and the G7 countries”. Economics Letters 83, 185-191.

Arabi, K., (2010). “Association between Inflation and its Uncertainty”. Journal of Business. Studies, Quaterly 2010. 2(1): 36-51

Azam, J., (2009). Inflation and Macroeconomic Instability in Madagascar. ARQADE and IDEI, University of Toulouse and Institut Universitaire de France.

Ball, L. P., (1992). “Why Does High Inflation Raise Inflation Uncertainty?” Journal of Monetary Economics”, 29, p. 371-388.

Barimah, A. and Amuakwa-Mensah, F. (2012). “Does Inflation Uncertainty Decrease With Inflation? A GARCH Model of Inflation and Inflation Uncertainty”. Journal of Monetary and Economic Integration Vol 12, No.2., p. 33-61.