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An Empirical Analysis of The Relationship Between Unemployment and Inflation in Nigeria From 1977-2009
An Empirical Analysis of The Relationship Between Unemployment and Inflation in Nigeria From 1977-2009
t-1
+ B
2 t-1
2
--------------------------------------------(2)
INFL
t
= a
2
+ a
3
INFL
t-1
+ e --------------------------------(3)
t
2
=
2
+ B
3
t-1
+ B
4 t-1
2
--------------------------------------------(4)
Where
INFL - Inflation rate
UNEMP - Unemployment rate
1
and
2
- Constant
B
1,
B
2,
B
3
and B
4
- ARCH and GARCH coefficients
B
1
t-1
- ARCH term
B
2 t-1
2
- GARCH term
e - Error term (white noise)
A PRIORI EXPECTATION
ECONOMIC A PRIORI CRITERIA
This refers to the sign and size of the parameters in economic relationships.
MODEL I
It is expected that a
0
> 0, a
1
< 0 and a
2
< 0
MODEL II
It is expected that B
1
+B
2
<1 and B
3
+B
4
<1
However, if the estimates of the parameter turn up with signs or size not conforming to economic
theory, they should be rejected, unless there is a good reason to believe that in the particular instance, the
principles of economic theory do not hold.
4.0 RESULTS AND FINDINGS
TABLE 2: REGRESSION RESULTS
Dependent Variable: UNEMPL
Method: Least Squares
Date: 03/02/12 Time: 20:18
Sample: 1977 2009
Included observations: 33
Variable Coefficient Std. Error t-Statistic Prob.
C 32.71779 5.425731 6.030117 0.0000
INFLA -1.512065 0.601582 -2.513480 0.0174
R-squared 0.169292 Mean dependent var 21.37273
Adjusted R-squared 0.142495 S.D. dependent var 18.67785
S.E. of regression 17.29598 Akaike info criterion 8.597517
Sum squared resid 9273.675 Schwarz criterion 8.688214
Log likelihood -139.8590 F-statistic 6.317584
Durbin-Watson stat 1.138311 Prob(F-statistic) 0.017364
Table 2 contains bivariate regression results for the relationship between unemployment and inflation. The results indicate that the
coefficient of inflation and the constant are statistically significant. Precisely, the coefficient of inflation is found to be statistically
significant at 5 percent level as indicated by its probability value 0.0174 and rightly signed (negative). This therefore, implies that
1 percent increase in inflation would reduce unemployment by 151.2 percent. The F-statistics value 6.32, which is the measure of
the joint significance of the parameters, is found to be statistically significant at 5 percent level as indicated by the corresponding
probability value 0.0174.
The R
2
value 0.1693 (16.93%) implies that 16.93 percent total variation in unemployment is explained by the regression equation.
Coincidentally, the goodness of fit of the regression remained low after adjusting for degree of freedom as indicated by the
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
Available online at http://www.businessjournalz.org/efr
53
adjusted R
2
(R
2
= 0.1425 or 14.25%). Durbin Watson statistic 1.14 in table 2 is found to be greater than R
2
value 0.1693 indicating
that the model is not spurious.
TABLE 3: UNIT ROOT TEST
Null Hypothesis: D(UNEMPL) has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic based on SIC, MAXLAG=2)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.678275 0.0001
Test critical values: 1% level -3.670170
5% level -2.963972
10% level -2.621007
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(UNEMPL,2)
Method: Least Squares
Date: 03/02/12 Time: 20:13
Sample(adjusted): 1980 2009
Included observations: 30 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
D(UNEMPL(-1)) -1.422372 0.250494 -5.678275 0.0000
D(UNEMPL(-1),2) 0.403134 0.175886 2.292013 0.0299
C -0.190772 3.252724 -0.058650 0.9537
R-squared 0.587316 Mean dependent var 0.083333
Adjusted R-squared 0.556747 S.D. dependent var 26.74832
S.E. of regression 17.80830 Akaike info criterion 8.691845
Sum squared resid 8562.657 Schwarz criterion 8.831965
Log likelihood -127.3777 F-statistic 19.21268
2.169205 Prob(F-statistic) 0.000006
The results of unit root are contained in table 3. The results revealed that all the variables of the model are found
to be stationary at both 1 percent, 5 percent, and 10 percent level with first difference (d(1)), which is indicated
by ADF results at all levels less than the critical values in negative direction. The null hypotheses are rejected at
1 percent significance level.
TABLE 4 : CAUSALITY TEST
Pairwise Granger Causality Tests
Date: 02/08/12 Time: 14:52
Sample: 1977 2009
Lags: 2
Null Hypothesis: Obs F-Statistic Probability
INFLA does not Granger Cause UNEMPL 31 1.27311 0.29684
UNEMPL does not Granger Cause INFLA 1.32802 0.28239
The results of Granger causality are contained in table 4. The results revealed that
there is no causation between unemployment and inflation in Nigeria. The F-statistics
values are all less than 2 which indicate acceptance of the two hypotheses of no
causation between the variables. The probability values also confirmed that given their
high values.
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
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54
The Johansen cointegration test results contain in table 5 below confirm the existence
of long-run relationship between unemployment and inflation as indicated by the
TRACE- Statistic. The TRACE-Statistic results revealed that there is 1 cointegrating
equation at 5 percent level and also the Max-eigenvalue revealed that there is 1
cointegrating equation at 5 percent level.
TABLE 5 :COINTEGRATION TEST
Date: 02/08/12 Time: 14:46
Sample(adjusted): 1979 2009
Included observations: 31 after adjusting endpoints
Trend assumption: Linear deterministic trend
Series: UNEMPL INFLA
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test
Hypothesized Trace 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
None * 0.439746 18.21338 15.41 20.04
At most 1 0.008131 0.253087 3.76 6.65
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Trace test indicates 1 cointegrating equation(s) at the 5% level
Trace test indicates no cointegration at the 1% level
Hypothesized Max-Eigen 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
None * 0.439746 17.96029 14.07 18.63
At most 1 0.008131 0.253087 3.76 6.65
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level
Max-eigenvalue test indicates no cointegration at the 1% level
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
UNEMPL INFLA
0.070431 0.131053
-0.000469 0.234523
Unrestricted Adjustment Coefficients (alpha):
D(UNEMPL) -10.33268 0.790288
D(INFLA) -0.907885 -0.240750
1 Cointegrating Equation(s): Log likelihood -202.4224
Normalized cointegrating coefficients (std.err. in parentheses)
UNEMPL INFLA
1.000000 1.860740
(0.72600)
Adjustment coefficients (std.err. in parentheses)
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
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55
D(UNEMPL) -0.727738
(0.19774)
D(INFLA) -0.063943
(0.03876)
TABLE 6: ARCH and GARCH RESULTS
Dependent Variable: UNEMPL
Method: ML - ARCH (Marquardt)
Date: 03/02/12 Time: 21:14
Sample: 1977 2009
Included observations: 33
Convergence achieved after 129 iterations
Variance backcast: ON
Coefficient Std. Error z-Statistic Prob.
C 24.52172 4.069828 6.025247 0.0000
INFLA -0.825710 0.370758 -2.227083 0.0259
Variance Equation
C 4.979235 27.16191 0.183317 0.8545
ARCH(1) 0.903699 0.789814 1.144193 0.2525
GARCH(1) 0.367203 0.317549 1.156367 0.2475
R-squared 0.106978 Mean dependent var 21.37273
Adjusted R-squared -0.020596 S.D. dependent var 18.67785
S.E. of regression 18.86921 Akaike info criterion 8.340791
Sum squared resid 9969.322 Schwarz criterion 8.567534
Log likelihood -132.6230 F-statistic 0.838557
Durbin-Watson stat 1.029681 Prob(F-statistic) 0.512397
The ARCH and GARCH results contain in table 6 reveals that the time series data under consideration is
volatile. This is indicated by the sum of the ARCH and GARCH coefficient (0.9037 + 0.3672 = 1.2709). This
result shows that there is high volatility clustering in the data.
5.0 CONCLUDING REMARKS
This paper investigates the impact of government expenditure on education and health on economic growth and
development in Nigeria through the application of Augmented Dickey-Fuller technique in testing the unit root
property of the series, the Granger causality test for causation was conducted, Johansen cointegration test of the
existence of long-run relationship of variables in the model and ARCH and GARCH techniques was conducted
to test the presence of volatility in the series. The results of unit root suggest that all the variables in the model
are stationary, the results of causality suggest no causation between unemployment and inflation in Nigeria, the
results of cointegration technique suggest that there is long-run relationship between unemployment and
inflation and ARCH and GARCH results suggest that the data is volatile. The results also revealed that when
inflation is increased by 1 percent unemployment will reduce by 152 percent in inflation. Despite the negative
relationship revealed by the regression results, the applicability of various theories of unemployment and
inflation in Nigeria is minimal. This paper therefore, recommend the use of theories drawn from data sourced
within the country. A major policy implication of this result is that concerted effort should be made by policy
makers to increase the level of usage of unemployment/inflation theory that is base on Nigerian data and
situation (they should stop copying theories from the western world) for they are detrimental to the growth and
development of the Nigerian economy.
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
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56
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Appendix
TABLE 1: Unemployment rate and inflation rate from 1977-2009
years unemployment rate inflation rate
1977 21.5 4.3
1978 13.3 4.3
1979 11.6 4.3
1980 10.0 6.4
1981 21.4 6.4
1982 7.2 6.4
1983 23.2 6.4
1984 40.7 6.2
1985 4.7 6.1
1986 5.4 5.3
1987 10.2 7
1988 56.0 5.3
1989 50.5 4.5
1990 7.5 3.5
1991 12.7 3.1
1992 44.8 3.4
1993 57.2 2.7
1994 57.0 2
1995 72.8 1.8
1996 29.3 3.4
1997 10.7 3.2
1998 7.9 3.2
1999 6.6 3
2000 6.9 18.1
2001 18.9 13.7
2002 12.9 12.2
2003 14.0 14.8
2004 15.0 11.8
2005 17.8 11.9
2006 8.2 13.7
2007 5.4 14.6
2008 11.6 14.9
2009 12.4 19.7
Source: CBN Statistical Bulletin, 2009.
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Most systematic evidence for the past two decades is given in Table 1 and figure 3 and
4, which show the rates of inflation and unemployment in seven industrialized countries
over the past two decades. According to the five year averages in Table 1, the rate of
inflation and the level of unemployment moved in opposite directions the expected
simple Philips curve outcome in five out of seven countries between the first two
quinquennia (1956 60, 1961 65); in only four out of seven countries between the
second and third quinquennia (1961-65 and 1966-70); and in only one out of seven
countries between the final two quinquennia (1966-70 and 1970-75). And even the one
exception-Italy is not a real exception. True, unemployment averaged a shade lower
from 1971 to 1975 than in the prior five years, despite a more than tripling of the rate of
inflation. However, since 1973, both inflation and unemployment have risen sharply.
UNIT ROOT TEST
Null Hypothesis: D(UNEMPL) has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic based on SIC, MAXLAG=9)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.678275 0.0001
Test critical values: 1% level -3.670170
5% level -2.963972
10% level -2.621007
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(UNEMPL,2)
Method: Least Squares
Date: 02/08/12 Time: 15:26
Sample(adjusted): 1980 2009
Included observations: 30 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
D(UNEMPL(-1)) -1.422372 0.250494 -5.678275 0.0000
D(UNEMPL(-1),2) 0.403134 0.175886 2.292013 0.0299
C -0.190772 3.252724 -0.058650 0.9537
R-squared 0.587316 Mean dependent var 0.083333
Adjusted R-squared 0.556747 S.D. dependent var 26.74832
S.E. of regression 17.80830 Akaike info criterion 8.691845
Sum squared resid 8562.657 Schwarz criterion 8.831965
Log likelihood -127.3777 F-statistic 19.21268
Durbin-Watson stat 2.169205 Prob(F-statistic) 0.000006
CAUSALITY TEST
Pairwise Granger Causality Tests
Date: 02/08/12 Time: 14:52
Sample: 1977 2009
Lags: 2
Null Hypothesis: Obs F-Statistic Probability
INFLA does not Granger Cause UNEMPL 31 1.27311 0.29684
UNEMPL does not Granger Cause INFLA 1.32802 0.28239
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
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CAUSALITY TEST
Date: 02/08/12 Time: 14:52
Sample(adjusted): 1979 2009
Included observations: 31 after adjusting endpoints
Trend assumption: Linear deterministic trend
Series: UNEMPL INFLA
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test
Hypothesized Trace 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
None * 0.439746 18.21338 15.41 20.04
At most 1 0.008131 0.253087 3.76 6.65
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Trace test indicates 1 cointegrating equation(s) at the 5% level
Trace test indicates no cointegration at the 1% level
Hypothesized Max-Eigen 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical Value Critical Value
None * 0.439746 17.96029 14.07 18.63
At most 1 0.008131 0.253087 3.76 6.65
*(**) denotes rejection of the hypothesis at the 5%(1%) level
Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level
Max-eigenvalue test indicates no cointegration at the 1% level
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
UNEMPL INFLA
0.070431 0.131053
-0.000469 0.234523
Unrestricted Adjustment Coefficients (alpha):
D(UNEMPL) -10.33268 0.790288
Economics and Finance Review Vol. 1(12) pp. 42 61, February, 2012 ISSN: 2047 - 0401
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D(INFLA) -0.907885 -0.240750
1 Cointegrating Equation(s): Log likelihood -202.4224
Normalized cointegrating coefficients (std.err. in parentheses)
UNEMPL INFLA
1.000000 1.860740
(0.72600)
Adjustment coefficients (std.err. in parentheses)
D(UNEMPL) -0.727738
(0.19774)
D(INFLA) -0.063943
(0.03876)