The Determinants of Inflation in Nigerian Economy: Impact Analysis

Abstract

 This research was designed to investigate the determinants of inflation in the Nigerian Economy from 1981 to 2023. Time series data were obtained from the Central Bank of Nigeria Statistical Bulletin and World Development Indicator. Inflation (INFR) represents dependent variable while Total Export (EXP), Total Import (IMP), Government Expenditure (GEXP), Exchange Rate (EXCH) and Interest Rate (INT) all represent the explanatory variables. The paper used the Autoregressive Distributed Lag approach (ARDL), co-integration test and an error correction model to examine the determinants of inflation in Nigeria. The anticipated coefficients of the variables specified that all the variables are integrated in the same order 1(1) exception of IMP which was integrated of order 1(0). IMP, GEXP, EXCH and INT were inversely related with inflation in the short run exception of EXP that is positively related with inflation. In the long run, all the variables were negative with significant impact on inflation in Nigeria exception of export and exchange rate that were positively related with inflation but the exchange rate alone was not statistically significant. The government should ensure that monetary policy of central bank is on the same page as fiscal policy of the federal Ministry of Finance. Government should discourage border closure policy in the economy. The government should use interest rate as a tool to control inflation in the economy. Inversely, when inflation is high the government can raise interest rates to slow down the economic activities and vice versa.