Re-examining the Inflation and Output Relation in Nigeria: A Multivariate Analytical Evaluation, 1960-2014

Abstract

The link between inflation and total production has been widely reviewed with mixed results and differing opinions. In the case of Nigeria, we have strengthened on the coverage period and the quantitative techniques of analysis in other to overcome some limitations in previous studies. This study therefore re-examined the relationship between inflation and output level in Nigeria using annualized time series from 1960 to 2014. The Autoregressive distributed lagged (ARDL) model was used to estimate the growth regression model while the Bound test was used to test for long-run relationship. Vector Autoregressive causality test was utilized to determine the directional of causality between our series of interest. The findings showed that inflation and official exchange rate have non-significant positive impact on Nigeria’s output level between 1960 and 2014. Real interest rate had significant negative impact on output. The result of the Bound test revealed that there is a long-run relationship between output and inflation. Moreover, the findings further indicated that there is a bi-directional causality running from inflation to output, and from output to inflation. This means that past values of inflation can help to predict output level and vice-versa. We, therefore, concluded that inflation level within a modest threshold has the potential of influencing level of production in the economy. It is noteworthy that past values of output is critical in forecasting inflation. Likewise, for output to be predicted, past values of inflation is vital. Hence, this study has policy implications, and will aid policymakers in establishing effective forecast framework which is necessary for effective maintenance of price stability while ensuring sustained output growth.