Changes in Inventories, Capacity Utilisation Rate and Inflation Dynamics in Nigeria

Abstract

The paper empirically examined the relationship existing among current inflation, expected future inflation, changes in inventories, manufacturing capacity utilisation rate, output gap, labour income share and trade openness in Nigeria using the annual time series data spanning from 1981 to 2015 by employing the Vector Autoregressive (VAR) Model. Stationarity, co-integration and causality tests were conducted on all the variables of interest in the study. The Block Exogeneity/WALD test result in the study confirms that changes in inventories and manufacturing capacity utilisation rate are exogenous variables while current inflation rate, expected future inflation, labour income share, output gap and trade openness are endogenous variables. The study finds that there is bi-directional causality running from current inflation to expected future inflation which implies that the anticipation of inflation can itself be the cause of inflation in Nigeria.  There is also bi-directional causality running from current inflation to output gap indicating that current inflation granger causes output gap in Nigeria. There is also bi-directional causality running from manufacturing  capcity utilisation rate to expected future inflation indicating that expected future inflation granger causes manufacturing capacity utilisation in Nigeria. The policy implication of the findings of the paper is that the policy makers should take into account the likely influence of changes in inventories, expected future inflation, manufacturing  capcity utilisation rate,output gap,labour income share and trade openness on domestic prices of goods and services in formulating trade and economic policies in Nigeria.

Keywords: Changes in inventories, labour income share, inflation dynamics, manufacturing capacity utilisation rate, output gap and trade openness