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.
Keywords
H Social Sciences (General), HG Finance