Analysis of the dynamic of inflation process in Nigeria: An application of GARCH modelling

Ekpeyong, Paul (2023): Analysis of the dynamic of inflation process in Nigeria: An application of GARCH modelling.

Abstract

This study investigates the dynamics of inflation volatility in Nigeria, with a specific focus on the Food Consumer Price Index (CPI), Core CPI, and Headline CPI. The analysis utilizes the Autoregressive Conditional Heteroskedasticity (ARCH) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models to capture time-varying volatility in the inflation rates. The study covers the period from January 1995 to December 2022, employing monthly data sourced from the Central Bank of Nigeria database. The results indicate that all three inflation series display time-varying volatility, signifying varying degrees of fluctuations and uncertainties in price movements over different periods. Furthermore, the presence of ARCH and GARCH effects in the residuals of the volatility models confirms the dynamic nature of inflation volatility. The study identifies significant structural breaks in the volatility of Food CPI during the years 2000, 2008, and 2018, emphasizing the importance of understanding the drivers of inflation volatility. External events and policy changes during these periods impacted food prices and led to shifts in volatility. Policy recommendations are made to address the challenges posed by inflation volatility in Nigeria. These include implementing price stability measures, enhancing food security, strengthening monetary policy, promoting data transparency and analysis, and undertaking fiscal reforms. The findings of this study contribute to a deeper understanding of inflation volatility in Nigeria and provide valuable insights for policymakers in formulating effective strategies to manage inflation and achieve macroeconomic stability. The study highlights the importance of monitoring inflation dynamics and implementing timely policies to ensure sustained economic growth and development in the country.

• Item Type: MPRA Paper
• Language: English
• Keywords: ARCH, Consumer price index, Headline, core, volatility, GARCH
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

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