The main determinants of inflation in Nigeria

Thesis, 2012

Like many countries, one of the most fundamental objectives of macroeconomic policies in Ethiopia is to sustain high economic growth with low inflation. The relationship between growth and macroeconomic variables is one, which many economists have watched with keen interest. This paper investigates the relationship between growth and inflation based on unstructured VAR model. The methodologies used in this study are the cointegration, Granger causality and vector error correction model test. Consumer price index (CPI) was used as a proxy for inflation and the real GDP as a perfect proxy for economic growth to examine the relation. The scope of the study spanned from 1976-2010. A stationary test was carried out using Graphical approach and Augmented Dickey Fuller test (ADF) and Phillip-Perron test (PP) and stationarity found at first difference at 5% level of significance. The Johnson cointegration test using Trace statistic and Maximum eigenvalue test result showed that for the periods, 1976-2010, there was long run co-integrating relationship between growth, inflation and the selected macroeconomic variable broad money supply. Based on the result economic growth and inflation has a negative relationship with low standard error value implying a low statistical noise in the estimates. A positive relationship was found between inflation and broad money supply with low standard error in the long run. The relations are statistically significance at 10% level of significance for both independent variables. Similarly, in the short run inflation level of last year and real GDP negatively and significantly affecting the inflation level. While broad money supply positively related with inflation level. Moreover the result reveals that the coefficient of the error-term or the speed of adjustment term for the estimated inflation equation is both statistically significant and negative. Implying that, if actual equilibrium value is too high, the speed of adjustment will reduce it and if it is low, the error correction term will raise it. The coefficient term -0.481111 shows that 48 % adjustment will be taken each year to converge to the long run equilibrium level. The parsimonious model and variance decomposition approach confirmed the result. And, Granger causality test results showed unidirectional causality. Therefore, the study advices Policy makers to adopt inflation targeting strategy, taking combined fiscal and monetary policy together, regulations on commercial financial lending institutions and government should curtail unproductive expenditure.

Research Paper, 2023

Ethiopian economy is one which has experienced consistently a high exchange rate depreciation and money supply with unstable inflation rate for the last many years. The main objective of the study was to examine the effect of money supply and exchange rate on inflation in Ethiopia by using annual time series data over the period from 1980 to 2021. For this purpose both descriptive and econometrics methods of analysis, such as the Classical OLS long run regression, Engle-granger causality and Error correction models were employed. The result of the study revealed that both money supply and real effective exchange rate have a positive and statistically significant effect to influencing inflation rate, in the long run as well as short run. Moreover, the result revealed that there are 3 bi-directional of granger causality (MS and CPI, CPI and REER and MS and REER). Based on these results, the following recommendations are proposed. NBE should be reduced and restricted the borrowing interaction with government, ministry of finance in particular. NBE should have to exercise a natural rights gives for central banks. Specifically, an operational independency is the core and decisive right that one central bank must use to achieve its objective like price stability as well as it's the most important right to manage the stock of money in the economy. .

Journal of Economics and Sustainable Development, 2020

One of the prime objectives of governments is achieving stable macroeconomic condition. This objective requires that prices be kept to a reasonably stable level. High and persistent inflation introduces uncertainties into the economy and may lead to slowdown of economic growth by discouraging domestic as well as foreign investments. It may also cause balance of payments problems by eroding a country's competitive advantage. Moreover, because it hits the poor the most it needs to be tackled. This study aims at understanding the forces behind the current inflationary process in Ethiopia. In order to achieve the stated objective a synthesis model of monetarist and costpush inflation theories is estimated using vector autoregressive (VAR) and single equation error correction models. The estimated models enable to understand the short run and the long run inflation dynamics in Ethiopia between 1980 and 2017.The result shows that in the long run real money supply. Real GDP growth real effective exchange rate and Budget deficit have significantly affect inflation. But budget deficit and real GDP is not found the expected sign rather. The short run the change in real GDP growth and change real money supply significantly affect inflation. However the change real effective exchange rate and budget deficit are insignificant. The study suggests that adopting restrictive monetary and fiscal policy. Have essential tools to curb inflationary problem of Ethiopia.

Economics, 2015

Using Granger-causality approach, this study was intended to establish the relationship between exchange rate and inflation measured by CPI in South Sudan using time series monthly data for the period August 2011 to November 2014. The study reveals that there exists a unidirectional causality from exchange rate to CPI without feedback. This means depreciation of South Sudanese currency is detrimental to the economy of South Sudan. Although CPI failed to cause changes in exchange rate, there is no way to conclude with greater confidence that the results are true. The effect of the pressure of an increase in price level on exchange rate could have been from the response of monetary authorities in bridging the gap between the price level and the purchasing power of people in the economy. In South Sudan, with no response from the monetary authorities to increase money supply, the effect of increase in prices on exchange rate has been suppressed and only manifests itself in terms of suffering encountered by the economic actors with consumers and mainly the low-income consumers hit hard.Given the results, there is a need for the authorities to manage the exchange rate and save the domestic currency from depreciation. In search of more information, the study recommends further research to be conducted with the aim of establishing the weaknesses and strengths of South Sudan Central Bank management in carrying out effective monetary policies in the country.

2014

Ethiopia is one of countries in Sub Saharan African with moderate economic growth in recent years. The aim of this study was to examine the relationship between inflation rate and economic growth in Ethiopia. The methodology employed in this study is the vector error correction model (VECM). The series considered are consumer price index (as a proxy for inflation rate), real GDP (constant 2005 USD) (as a measure of economic growth) and openness. Annual data on inflation rate, openness and real GDP for the period from 1992 to 2012 are obtained from the World Economic Outlook (WEO) database of the International Monetary Fund (IMF). A stationarity test was carried out using the Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) tests. The null hypothesis of a unit root was not rejected for all series under consideration implying that the series are all non-stationary in levels. The first differences of all series, however, were found to be stationary. For the period spanning from 1992 to 2012, there was one co-integrating relationship between openness, inflation rate and economic growth. The estimated long run model shows that there exists strong inverse long-run relationship between inflation rate and economic growth. The estimated coefficient of the error correction term (0.0143) shows that about 1.43% of the short run disequilibrium in real GDP will be adjusted within a year. In the short run, one time lagged inflation rate has a significant negative impact on the current real GDP whereas two time lagged openness has a significant positive impact. The impulse response functions reveal that inflation rate and openness innovations have a positive impact on real GDP. The results of Granger causality test show that a unidirectional causality was running from economic growth to inflation.

2016

The research paper examines the level, nature of association as well as the impact of exchange rate fluctuations on inflationary pressure and other selected macroeconomic indices in Nigeria between 1979 and 2010. Ordinary least squares method in the form of multiple regressions was applied to evaluate their association and impact and Granger Causality technique to evaluate their causality. Co integration procedure was also applied to assess whether their relationships will stand the test of time. A Stationary test was conducted using the Augmented Dickey- Fuller (ADF) tests. The result reveals that exchange rate and inflationary rate are positively related, though not to a very significant extent. This signifies that fluctuations in exchange rate can as well result in a proportionate response in the prevailing inflationary rate. The study reveals that there is no causality in any direction between exchange rate and inflationary rate. Unidirectional causality runs from interest rate ...

2013

This paper investigates the core factors affecting the price level in republic of Tajikistan by using 'auto regressive distributed lags' and Johansen-Juselius cointegration models. The empirical analysis is based on a dataset of demand pull and cost push inflation indicators. We used the monthly data for a period of 2005 to 2012. The findings of this study reveal that in the long run exchange rate, world wheat prices, world oil prices and labor supply Granger cause the price level. Nevertheless, in the short run only world wheat price and labor supply has significant impact. In case of demand pull inflation, in the long run, GDP gap, remittances inflow, and real wages are endogenously determined in the system as they significantly affect the price level. But in the short run, GDP gap, remittances inflow, broad money, government expenditure and real wages Granger causes the price level. Furthermore, there is a bi-directional Granger causality between GDP gap and remittances inflow. Also, real wage Granger causes the government expenditures. The GDP gap Granger causes the real wage, implying the scenario that a major cause of under production is the low level of employment. Finally the price level also Granger causes the real wage, is a reflection of a negative relationship between them.

Uluslararası İktisadi ve İdari İncelemeler Dergisi, 2019

The purpose of this study is to examine the relation between the inflation rate, foreign exchange rates of the major currencies used in the northern region of Iraq (NRI), money supply and gross domestic product (GDP) for the period 2008-2016. It is notable that the region suffers from high inflation rates and there were fluctuations in foreign exchange rates after the fall of the former Iraqi regime in 2003. This is the first article about this subject for NRI using an error correction model and the results indicate that there is a long-run relation between variables. The relation between US Dollar and inflation in the region is positive and statistically significant. There is a negative relation between Euro and inflation, which is also statistically significant. NRI imports many goods and services from Turkey, but a surprising result is that the Turkish Lira variable is not statistically significant. This may be due to the fact that import payments are done with Dollars and not Tu...

Yönetim Bilimleri Dergisi

High inflation is among the undesirable conditions for the economies of countries in terms of macroeconomics. Inflation is generally seen in economies for two different reasons. These can be listed as demand-pull inflation and cost-push inflation. The objective of the study is to investigate the source of inflation in Turkey. For this purpose, monthly producer price index and consumer price index series for the period of January 2006 and July 2021 were used. First, the stationarity of the variables was analyzed with the Generalized Dickey Fuller Unit Root Test. Then, the Granger Causality Test was applied to the variables. As a result of the analysis, a one-way causality relationship from producer price index to consumer price index was determined. This shows that inflation in Turkey is generally caused by costs. For this reason, the implementation of cost-oriented policies to combat inflation will contribute more to the decrease in inflation.

While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Abstract-While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Moreover, the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) Unit Root tests confirmed that the variables concerned are all integrated of order one, (I(1)). ECM regression suggest that money supply, real Gross Domestic Product, trade openness, real exchange rate, budget deficit and the nominal deposit interest rate variables have together been important in explaining the long run dynamics of inflation. Except real Gross Domestic Product and nominal deposit interest rates, the effects of the remaining ones persist also in the short run. Moreover, money supply was estimated to impose the dominant effect towards validating the classical version of QTM in the context of Ethiopian economy. Besides, monetary policy is found to be more important in the dynamics of inflation compared to fiscal policy. Furthermore, VAR Granger Causality test suggests the causation running from budget deficit to money supply; and, from money supply to inflation, but no causality was suggested in reverse. This also reveals partly the applicability of the Sargent and Wallace (1981) aspect of the so called 'fiscal dominance' in Ethiopia. Finally, the study suggests for the enhancement of effectively designed and implemented network of both monetary and fiscal policies considering the power of money supply on inflation. Moreover, investments in food and agricultural sectors could considerably support the process of ensuring price stability.