Dynamics of Inflation and Unemployment in a Vector Error Correction Model

Abstract

We examined the dynamics of inflation and unemployment in Nigeria using the vector error correction methodology over a period of twenty seven years. The study finds evidence of stagflation in the Nigerian economy over the period of study. In fact, the Nigerian economy is managing a shocking rate of inflation together with a severe recession as the unemployment rate has risen astronomically. Consequently, the Nigerian economy is at a cross road. Based on these findings, it is recommended that the CBN maintains a stance of gradual reduction of the benchmark inflation rate to a single digit as the excessive contraction of the monetary policy rate seems to have become counterproductive in recent times. Single digit inflation rate can be achieved if the CBN could increase GDP growth above money supply and increase lending to the real sector of the economy.

Keywords: Inflation targeting, unemployment, monetary policy, stagflation, Nigeria, Phillips curve, NAIRU