Error Correction Model Analysis of Determinants of Inflation in Nigeria (1970-2013)

Abstract

The research study examined the “Error correction model analysis of determinants inflation rate in Nigeria’’, for the period 1970 - 2013, employing the Error Correction Technique of econometric analysis.  The data were sourced from the Central Bank of Nigeria statistical bulletin of various years.  The test of both the Unit root and co-integration revealed that there is a long relationship between the variables while the Granger Causality test revealed an un-directional relation between the variables and inflation.  However, the VECM test revealed that inflation, Gross Domestic Product (GDP) and exchange rate are negatively related and positively related to broad money supply (M₂) and domestic credit.  The study is of the recommendation that Central Bank of Nigeria should balance its control instruments to achieve macroeconomic stabilization and development, money supply should be controlled to ensure high employment, interest rates should be liberalized to control price and output movement and the policy measures should be designed in a way that enhances the attainment of the macro-economic objectives.

Keywords: Error Correction Model, Determinants, Inflation, Nigeria