Determinants of behavior of inflation rate in Nigeria

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Inflation is an important macroeconomic issue that has continued to dominate discussions at major economic fora over time. Governments all over the world are concerned about its rising trend because of its pervasive effect on economic performance. One intriguing fact about inflation is that it is both the cause and effect of certain policy actions of government. Several studies have been conducted on the effect of inflation on economic activities in developing and developed nations, but studies on its cause, particularly in developing nations, are scant. This paper aims at identifying major factors that cause inflation in Nigeria. Based on the autoregressive distributed lag (ARDL) estimation method, the study shows empirical support for significant impact of external debt, exchange rate, fiscal deficits, money supply and economic growth on inflation. It further shows previous period or lagged inflation rate as a significant determinant of current inflation rate. However, the study produced no evidence of significant longrun impact of interest rate on the rate of inflation in Nigeria. The study recommends economic reforms that target foreign exchange inflow through increased export trade, as well as a paradigm shift away from deficit budgeting. There is also a need for infrastructural and institutional reforms to eliminate or, at least, minimize the impact of structural inequity on output prices.

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    • Figure 1. Jarque-Bera normality test
    • Figure 2. Cumulative sum of residuals: the broken lines represent the critical bounds at 5% level of significance
    • Figure 3. Cumulative sum of residual squared: the broken lines represent the critical bounds at 5% level of significance
    • Table 1. Unit root test using the ADF test statistics
    • Table 2. ARDL results
    • Table 3. Bound testing result
    • Table 4. ARDL error correction regression
    • Table 5. Breusch-Godfrey serial correlation LM test
    • Table 6. Heteroskedasticity test: Breusch-Pagan-Godfrey