Inflation and Inflation Uncertainty in Nigeria; a dynamic causality Analysis

Abstract

The phenomenal effect and impact of inflation for a growing economy cannot be over emphasized. An inflationary situation is generally characterized by a persistent upward movement in the prices of goods and services. The severity in which an inflationary pressure is exacerbated for a growing economy calls for adequacy in policy measures in combating this trend. However, the magnitude and extent of the adverse impact of inflation depends on whether it is adequately anticipated or unanticipated.  A huge dichotomy exists in literature with respect to the relationship between anticipated inflation and inflation unanticipated. In this regards, the nexus between actual inflation and inflation uncertainty and the detrimental impact of inflation uncertainty on output growth in an economy has received extensive coverage. This is predicated on the huge cost of inflation for a growing economy with particular emphasis on the real economic sector.

This study set forth to provide further examination detailing the empirical linkage between inflation and inflation uncertainty for the case of the Nigeria economy form year 2000 up until 2014. A two-fold estimation technique is utilized for this study in line with other rich empirical studies namely; Grier and Perry (1998); Nas and Perry (2000); Fountas et.al (2004) ; Aboagye and Byekwaso (2005); Heidar and Bashiri (2010) and Viorica et.al (2014). In general, the two-fold estimation technique as implied for the current study proceed with the estimation of the conditional variance of the inflation uncertainty series in the context of a GARCH type model. This is then followed by a causality test in the context of the granger causality to help answer the research question of whether changes in inflation granger cause inflation uncertainty and the extent of the directional change for the case of the Nigerian economy. In the context of a managed float exchange rate regime, the Nigeria apex regulatory monetary authority is considering a transition to a full-fledged inflation targeting regime.  Hence, the empirical findings of this study provides essential insight on policy issues to be considered in furtherance to the goal of adopting a holistic inflation targeting framework for the Nigerian economy and certainly a variety of emerging economies in Africa.