CHAPTER ONE

1.1 Introduction
The pursuit of price stability has become a primary mandate for most monetary authorities both
developed and developing countries (Tule et al., 2018). This consideration is underscored by the
grievous consequences of high inflation rates on the macro-economy such as negative real
interest rates, worsening currency, low savings, high cost of borrowing, low real returns on
investment, high unemployment, falling real income and standard of living, etc. Since inflation
affects the cost of borrowing and returns on investment, investors are also concerned about the
behaviour of inflation and therefore factor in such information when making investment
decision. Owing to the implications of inflation on purchasing power and standard of living, the
consumers also express some fears when a higher inflation rate is anticipated. Thus, inflation is
considered as a good measure of macroeconomic stability as it affects all sectors (both public
and private sectors) of the economy and that partly explains why the issue of price stability
usually attracts the attention of policy makers, investors and researchers (Tule et al., 2018).

An economy that is faced with 3 to 6 per cent rate of inflation may experience positive economic
effect. Inflationencourages investment and production and as such increase growth in wages and
consumption. But, a highinflation rate in the range of double digit may produce a negative
economic effect. This will adversely affectpurchasing power of the consumer. It can lead to
uncertainty of the value of gains and losses, borrowers andlenders as well as buyers and sellers
(Anfofum et al., 2015).

Furthermore, higher level of inflation createsuncertainty which discourages savings and

investment. Savings are discouraged as inflation reduces the real rateof return on financial assets.
This again leads to low investment and a declining economic growth. High inflationrate erodes
the gains from growth and leaves the poor worse off thereby increase the divide between the rich
andpoor in the society. A high inflation rate result from increase in food prices, it hurts the poor
because of their high marginal propensity to consume (Mohanty and John, 2015). The main
target of every nation’s monetary and fiscal policies, whether a developed or less developed
nation hasbeen the maintenance of a low and relatively stable rate of aggregate inflation.

1
Economic stability is oftenregarded as the baseline for the realization of macroeconomic
objectives (Murshed and Nakibullah, 2015).

According to Hamza and Zunaidah (2017), Nigeria inflation in the lst two decades has assumed
different dimensions and accelerated considerably.Non-stationary price path introduces
uncertainty in the objective function of economic agents, reduces economicefficiency and
consumer welfare. This is the reason why inflation as a macroeconomic variable or
phenomenonhas received much attention in recent time.

Inflation is usually the result of the interplay of many factors. The Nigerian economy
immediately after the civilwar progressed rapidly in the large inflow of petrodollars courtesy of
the crude oil boom of the early 1970s. Thelarge petrodollar allowed investment expenditure to
increase rapidly and thus, the purchasing power rosesignificantly for a number of persons in the
economy (Kuijs, 1998). The increase in salary of workers in 1975 further enhanced the
purchasing power of the individuals. Oil revenue increase significantly and by 1980,Nigeria was
rated one of the middle income countries. Despite this fit inflation, deficit finance, balance
ofpayment disequilibrium and corruption have appeared on the scene as a case of concern.

Most significant of these macroeconomic factors is inflation as an epicenter due to its general
effects on prices ofgoods and service and growing ability to relegate economy. In the 1980s, oil
production fell and the productionquota also decline leading to fall in oil price and revenue. The
country had to resort to borrowing in order to meet its financial obligations. Also, the lackluster
performance of the economy and inadequate tax programs frustrated government efforts at
generating enough revenue for expenditure, hence the pursuance of the policythat finance
government expenditure by creation of money becomes inevitable (Onwioduokit, 2002).
Morerecently, the financial tsunami and drought that hit most part of the world has created a
supply crisis, aggravatingthe upward trend in food prices (Durmus, 2008). Nigeria is an import
dependent nationThe growing gap between domestic demand and domestic production was filled
by a sharp increase in net imports. With the attendant slow growth rate in developed economies,
looming financial crises and increasing tariffs, it became obvious that the Nigeria nation have
imported inflation courtesy of the high marginal propensity to import.

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The three major explanations of inflation include fiscal, monetary, and balance of payments
aspects. Monetary aspect, inflation is considered to be due to an increase in money supply, in
fiscal aspect, budget deficit are the fundamental causes of inflation. However, the fiscal aspect is
closely linked to monetary explanations of inflation since government deficit are often financed
by money creation in developing countries. In the balance of payment aspect, emphasis is placed
on exchange rate. That is the collapse of exchange rate brings about inflation either through
higher import prices and increase in inflationary expectation, which are often accommodated or
through an accelerated wage indexation mechanism (Akinbobola, 2012).

Inflation rate in Algeria has opted for a development strategy based onindustrialization of the
country. Indeed, industrialization had alwaysbeen at first concern for Algerian authorities.
During the 1960sand 1970s oil revenues began to rise dramatically and thus thegovernment
shifted its economic sights to the oil industry. As a result, extensive industrialization took place
and the economy flourished.Until 1967, the structure of the Algerian economy, especially forthe
banking and monetary system, corresponded to the normsof a market economy. The choice of
centrally planned decisioneconomy as a system for organizing the development of thenational
economy was made in the first 4-year plan, 1970-1973. This Soviet-type planning was
formulated in physical terms. Thiseconomic organisation led to spur investments that clearly
explainthe well performance of the Algerian economy after independence. Unluckily, oil prices
dropped in the 1980s, negatively impactingon Algeria’s economy which had become almost
completelydependent on oil.

In the 1990s and the beginning of the 2000s, the political andsocial context – what Algerians
discreetly call the events (“lesévènements”) and the low oil price frustrated the degree offreedom
of the governors. Indeed, Algeria suffered from a seriesof political issues from 1988 to 1998,
which was described andcalled as a civil war. These events followed years of
economicdeterioration which the country experienced in the 80’s afterthe oil price declined
which in turn led to downturn of Algeria’sdeficits and public debt. The sub- period was
characterised byhigh level of inflation and unemployment rate as well as low levelof growth.
Inflation was caused, with a lag of up to 12 months,by an increasing budget deficit linked to an
excessive increase ofthe money supply. Algerian political holders were then unable tocontinue
sustaining the manufacturing public sector. As a resultand similarly in many other transition

3
economies, by the 1980s,Algerian public enterprises were suffering from big losses thatcaused a
rise in industrial unemployment.

During this period, Algeria suffered from two IMF stabilization programs: A macroeconomic
stabilization program from April1994 to March 1995 and a structural adjustment program
fromApril 1995 to March 1998. These programs were designed forAlgerian economy’s reform
which the country was experiencinga recession with high unemployment rate, a large deficit
onthe balance of trade and high inflation. Certainly, at the end of 1993, the Algerian economy
was experiencing bad situation,i.e. recession, unemployment reached close to 30%, a
budgetdeficit equal to 8.7% of gross domestic product (GDP), a rapidgrowth of the money
supply (+21%), a deficit on the balance oftrade exacerbated by a fall in the exchange reserves
until they couldcover only 6 weeks of imports, and a debt burden of 82% of GDP.

The factors that burden the country were overcome in the 2000s: The “events” came to an end,
the dinar became more stable againstthe dollar, and due to oil price increased so that led to a
positivebalance of payment and a banking system with excess liquidity.Fortunately, Algeria
experienced stable and moderate inflationuntil the last 2 years. An action took place to reduce the
public debtand to protect public expenditures from fluctuations in the budgetsurplus due to
unpredictable variations in the oil price. Thus, arevenue regulation fund (FRR) had been created
following to therise in the oil price.

1.2 Problem statement

The emergence of substantial inflation figure in Africa has led to widespread studies about its
causes. Persistent price increases are among the most serious problems affecting every economic
unit.That is why very country is saddle with the responsibility of ensuring stability in general
price level as one ofcore macroeconomic objectives to achieve economic development (Godly
and Ukpere, 2016)

Inflation is everywhere and is interestingly touchy issue in macroeconomics (Anfofumet al.

2015). All daily newspapers cover the news about inflation. There is no dearth of literature on
inflation. It is the mostly discussed issue all over the world among policy makers and academia.
It is because of the fact that its effects are widespread and severe and the impacts are far
reaching. Inflation has been the major concern for the government since it has serious

4
implication for the living of commonpeoples. Moreover, it affects several macroeconomic
variables such as saving, investment, real interest, real wage, real income and level of
employment. Inflation depreciates domestic currency and the imports become more expensive
which further push up the domestic prices. In short, inflation is a burning issue in the
macroeconomics and main objective and function of central bank is to control inflation.

However, efforts by various governments to curb inflationary tendencies, the problems and its
effects continuedunabated. Its causes are many, vary, and well captured in literature. Such
studies are: Modebe and Ezeaku (2016), Okoye et al., (2017), Olokoyo Osabuohien, and Salami
(2009), Adeleye et al., (2017) to mention but few.Most significant effect ofinflation is its impact
on government revenues and non-performance of the economy. Inflation also makesbudgeting
and future planning difficult for economic agents imposes a drag on productivity, particularly
whenfirms are forced to shift resources away from products and services, thereby discouraging
investment andretarding growth (Orubu, 2009). The high inflation rate has become a serious
concern in the industrial and emerging market economies globally.Inflation constitutes one of the
factors responsible for poverty, low standard of living and growth in Nigeria and Algeria.Hence,
the study investigates the root causes of inflation in Nigeria and Algeria.

1.3 Research questions

The following are the research questions raised for this study;
i. What is the effect of real gross domestic product (RGDP) on inflation rate in Algeria and
Nigeria?
ii. Does long run and short run relationship exist between inflation and oil price in Algeria
and Nigeria?
iii. What is the causality between inflation and government spending in Algeria and Nigeria?
iv. Is there correlation between monetary policy (proxy by interest rate, money supply and
exchange rate) and inflation in Algeria and Nigeria?

1.4 Research objectives

The broad objectives of the study are to determined the causes of inflation in Algeria and
Nigeria. The objectives guiding this study are as follows;

5
 i. the effect of real gross domestic product (RGDP) on inflation rate in Algeria and Nigeria.
ii. to examine the long run and short run relationship between inflation and oil price in
Algeria and Nigeria.
iii. to determine the causality between inflation and government spending in Algeria and
Nigeria.
iv. to investigate the correlation between monetary policy (proxy by interest rate, money
supply and exchange rate) and inflation in Algeria and Nigeria.

1.5 Justification of the study

Mass of study investigated the determinants of inflation in many countries, however not many
have been implemented for oil exporting countries. Many studies analze the relationship between
inflation and determinants through demands and supply side effect factors along with monetary
factors and external sources. Literature use to analyze sources of inflation around the world using
four main suspects this include Alexander et al., (2015), Okoye et al., (2016), Modebe et al.,
(2016) for developing and developed countries. This study extends this work with an approach
that is diverging from the literature, where the emphasis is on the inflation differentials among
two OPEC countries (Nigeria and Algeria).

Also, to the best knowledge of the authors, no study has explored the effect of the oil price along
with internal and external factors influencing inflation. The first goal of this study fills this gap in
the literature and extend the fiscal and monetary model of the inflation rate used by Okoye
(2019) developed. This set up allows us to see how the oil price can affect the risk associated
with holding domestic money and hence the inflation rate. Then, using Nigeria and Algeria data,
the model will be estimated. The second goal of this paper investigates whether the behavior of
agents is forward-looking and is impacted by a policy regime change. In other words, how
private expectations are formed is important to policymakers, as policy recommendations depend
on whether agents are forward-looking or not. This important fact is completely ignored in the
existing literature.

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1.6 Scope of the study
The scope of this study is centered on the determinants of inflation in oil producing countries
covers 1980 to 2020. This scope was choosing to cover the period of oil price boom and oil price
decline. Also, to captured the policy that have been adopted by the government in the past such a
structural programme and the likes. In addition, it consider the period in which no quota of
production was in place for the oil producing country and aftermath of the OPEC benchmark for
each countries. The choice of 2020 as a terminal year is based on the fact that the data required
for the research are only available to that year.

1.7 Plan of the study

This study is divided into five (5) chapters. Chapter one comprises of general introduction,
chapter two comprises of relevant literature, theoretical review, methodological review and
empirical review, chapter three focuses on research methodology. Chapter four present the data
analysis for the finding, test of hypotheses and discussion of findings. Finally, chapter five states
summary of the study, summary of the study.

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 CHAPTER TWO

Literature Review

2.0 Conceptual review

2.1 Concept of inflation
Inflation is the decline of purchasing power of a given currency over time. A quantitative
estimate of the rate at which the decline in purchasing power occurs can be reflected in the
increase of an average price level of a basket of selected goods and services in an economy over
some time. The rise in the general level of prices often expressed as a percentage, means that a
unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted
with deflation, which occurs when the purchasing power of money increases and prices decline
(Bakare 2012).

2.1.1 Causes of inflation

An increase in the supply of money is the root of inflation, though this can play out through
different mechanisms in the economy. Money supply can be increased by the monetary
authorities either by printing and giving away more money to the individuals, by
legally devaluing (reducing the value of) the legal tender currency, more (most commonly) by
loaning new money into existence as reserve account credits through the banking system by
purchasing government bonds from banks on the secondary market. In all such cases of money
supply increase, the money loses its purchasing power. The mechanisms of how this drives
inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in
inflation.

i. Demand-pull effect
Demand-pull inflation occurs when an increase in the supply of money and credit stimulates
overall demand for goods and services in an economy to increase more rapidly than the
economy's production capacity. This increases demand and leads to price rises.

ii. Cost-push effect

Cost-push inflation is a result of the increase in prices working through the production process
inputs. When additions to the supply of money and credit are channeled into a commodity or

8
other asset markets and especially when this is accompanied by a negative economic shock to the
supply of key commodities, costs for all kinds of intermediate goods rise.Consequently,
employers increase the price of their commodities. Even if the wage is increased, the workers
would buy only as much as before because of the price adjustment on products by the
producer(Totonchi, 2011).

These developments lead to higher costs for the finished product or service and work their way
into rising consumer prices. For instance, when the expansion of the money supply creates a
speculative boom in oil prices the cost of energy of all sorts of uses can rise and contribute to
rising consumer prices, which is reflected in various measures of inflation (Jalil, 2011).

iii. Built-in inflation

Built-in inflation is related to adaptive expectations, the idea that people expect current inflation
rates to continue in the future. As the price of goods and services rises, workers and others come
to expect that they will continue to rise in the future at a similar rate and demand more costs or
wages to maintain their standard of living. Their increased wages result in a higher cost of goods
and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

2.1.2 Determinants of inflation

Notwithstanding, the general theories that explain inflation worldwide, the survey identified
these specific sources of inflation. The sources include:

a. Corruption

It is a known fact that Nigeria is infested with the corruption bug. Its damage to the Nigerian
economy is immense. Corruption in Nigeria manifests in different forms, these include extortion
from traders and motorists. These in turn pass the burden of such extortions to final consumers.
These may be observed at the highways, ports, National borders,, and even in offices. But, they
constitute an unnecessary part of the cost of production in Nigeria. Apart from the usual
extortion, there are real offending forms, that chief executives and politicians impose onwould-
be investors orpublic-supported programprograms. For example, there is no reason to explain
why fuel Premium Motor Spirit (PMS) should be sold beyond N60.00 aliter in Nigeria.

9
Coincidentally, it has been proved that a major source of the high prices paid for fuel is
associated with corruption (Okonjo-Iweala 2012).

b. Productivity constraints

There are structural limitations that affect productivity in Nigeria. For instance, in the
agricultural sector, low and obsolete technology is a key limiting factor, poor access to land, use
of poor inputs or inputs with poor disease resistance. All these lead to poor harvests. As a
developing society, Nigeria can only boast of few secondary products, thus output is often low.
Against limited output, the country has a dense population. This disconnect leads to a situation
where there is often competition for available goods and services. This explains why any change
in money supply impacinflation. The thecountry can increase output if these constraints are
addressed.

c. Inadequate social infrastructure

The main duties of government include the provision of social infrastructure such as roads, water
supply, power, telecommunication, security among others. The provision of these public utility
nets some cost of production for the private sector and impacts on the cost of the final output to
the consumer. But in Nigeria, such infrastructure is parlous. In many cases, the investor will need
to provide for an alternative source of power, as the public supply is unreliable, the investor may
need to construct and maintain the road to the factory, provide an alternative supply of water,
security among others inspite of huge taxes it may still need to pay.

d. Deficit financing by government

Deficit financing is pervasive in Nigeria, Nigeria depends on oil proceeds to fund its activities
and when its expectation is yet to mature, it could borrow. Technically, borrowing may not be
harmful, but when an entity persistently overspends its earnings, this becomes a real problem
especially if it is spent on recurrent items. Nigeria according to the Radio Nigeria Commentary
of 8th January 2013, is owing N6 trillion domestic debt and $5 billion international debt. Besides,
the government is the biggest borrower from banks in the local economy. This effectively limits
the ability of the private sector to participate in economic activities ultimately affecting total
output and marginal prices. In the 1970s government executed white elephant projects, in the
1980s economic restructuring, in the 1990s, transition to civil rule, and in the 2000 decade the

10
building of institutions to strengthen its nascent democratic institutions. These expenditures
effectively impact inflation in Nigeria (Obiwuru and Udoh, 2011).

e. Wage reviews

Wage reviews are worldwide but in many climes, such reviews are driven by the need to shore
up inflation or to stabilize workers' welfare. But in Nigeria especially since wages were
deregulated in the 1990s strike actions to press for wage increases have been frequent. Quite
often employers are stampeded to wage reviews that are not backed up by productivity. The
effect of these is the rise of the money supply as against fixed or limited output leading to
inflation. Often workers tend to compare their wages with their counterparts in other countries
using the extant exchange rate or compare with others in the local economy even in situations
where such comparisons do not match.

f. Inadequate storage facilities

As an agrarian economy, at harvest seasons, excess output needs to be preserved for use in times
of need. This may be efficiently done using modern technology or storage facilities such as Silos
or processed into secondary products, but this is a current challenge in the country. Annually,
farmers lose such items as tomatoes, maize, among others to poor storage facilities. This impacts
the morale of farmers as well as the total available goods in the market. The effect is scarcity at
planting seasons with the consequent rise in prices. The use of obsolete technology has its
limitation and there is a need for government to encourage the pervasive use of homegrown
technology in the processing of much agricultural outputs to enhance their shelf life. This will go
a long way to keep prices stable.

g. Import dependence

Nigerians have a high penchant for foreign goods. This is partly due to its low industrial status
and the flow of economic resources from petroleum products. As of 2008, about N80 billion was
targeted for rice imports (a product Nigeria couldexport). Nigeria imports several agricultural
products which she can be, net exporter for, thus losing substantial revenue from these products
(see Otto 2009). Apart from agricultural products, clothes, automobiles, and household
consumers are imported. The government had tried to encourage the consumption of local goods,
but the tendency is that government and its functionaries are good examples of inelasticity in the

11
demand for foreign goods especially health care, transport facilities such as helicopters and
airplanes. This dependence has meant that whatever inflation that exists in the international
market is imported into the country, so imported inflation is common in Nigeria.

h. Distribution mechanism

There is a penchant among some Nigerians to work like an “ant” and eat like an ‘elephant’. In
other words, these people wish minimum work for maximum pay. Because of this penchant,
there are many people involved in the distribution channel, adding only little value but extracting
much in the process. This explains the low capital-output ratio in public projects in Nigeria.
Similarly, for private-sector goods, a lot of middlemen are lined up between the producer or
importer and the final consumer. This may include the owner of the license, the actual importer,
the wholesaler, the retailer, and a lot more. All these tend to increase the cost of the items. This is
without prejudice to many rent-seeking and corrupt attitudes that may be imposed on the system.

i. Currency re-domination

Between 1st July 1959 when the Central Bank of Nigeria commenced operation and 2013, the
Nigerian currency has been partially or wholly re-dominated about twelve times, as follows: 1 st
July 1959, 1965, 1968, 1973, 1977, 1981, 1999, 2001, 2005, 2007 and 2012. These include the
introduction of new currency or the change of existing currencies N100.00, N200.00, N500.00,
and N1,000.00 were introduced in December 2009, November 2000, April 2001, and October
2005 respectively. On February 28, 2007, lower denominations were coined and issued to Bank
customers inspite of their protests (See Ezeibe and Onyeagwu. The unit prices of items bought
with such denominations rose and had remained high. This snowballed into the prices of other
items. This experience has been consistent with such introduction of high denominations.

j. High cost of borrowing

The cost of funds is also a key issue influencing inflation in Nigeria. Capital inadequacy is a
constraining factor affecting production in Nigeria. When capital is available its cost is often in
the double digits. This high cost is transferred into the cost of output, which the consumer
ultimately absorbs. Aside from the fact that the high cost of borrowing could mean high prices of
output, the high cost of borrowing discourages investors. It is also a source of unpaid or non-
performing loans. Because the interest rates are high and compounding, once total indebtedness

12
becomes unsustainable, some debtors tend to be discouraged (See Calvo 1992). When many such
situations occur with any bank, the bank may fail, further worsening the economic position of the
entire economy.

k. Extra-economic problems

Several other issues impact inflation in Nigeria, these could be social, political, climatic, or
institutional. For example, the dearth of inputs and factors encourages market failure in Nigeria.
With firms operating as monopolies, oligopolies,etc, pricing is manipulated to extract rent
incomes. This is further fueled by the premium placed on material trappings by many Nigerians.
Aside from this the size of the public sector and

2.1.3 Why oil price in Nigeria inflation forecast?

The Nigerian economy essentially relies on oil revenue to meet its development goals. This
continued reliance on oil constantly puts the economy under pressure owing to the susceptibility
of the crude oil market to demand and supply shocks with attendant consequences on the
domestic economy. For instance, negative supply shocks due to political tensions in the oil-
producing nations have been documented to influence the supply of crude oil and by implication
oil price (see Salisu et al., 2017 and the papers cited therein).
Similarly, demand shocks due to unanticipated increases in tax and interest rate, reduction or
removal of subsidies, stock market crashes, terrorist attacks, and natural disasters leading to
economic downturns, are capable of reducing the demand for goods and services and by
extension the demand for crude oil with implication on the oil price. Such upward and downward
swings in oil price, due to these shocks, are expected to have significant impacts on Nigeria's
inflation due to the structural characteristics of the economy (Masha, 2000).
In addition to the heavy reliance of the country on oil revenue, the government is also pressured
to ensure a constant supply of foreign exchange to meet high import bills occasioned by a low
production base. Thus, the structural rigidities of the Nigerian economy expose the country to
external shocks, particularly oil-related shocks, with implications on inflation engendered by the
exchange rate pass-through. As noted by Olofin and Salisu (2017), the monetary policy authority
(i.e. the Central Bank of Nigeria) is concerned about ensuring price stability, and therefore,
knowledge of the inflationary effects of oil price shocks will assist in the coordination of policies
to accommodate these shocks when they arise.

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Aside from the exposure of the Nigerian economy to global oil price shocks, the country is also
confronted with unabated demand for oil by both public and private sectors, caused by the need
to provide alternative sources to the erratic electric power supply. This, in a way, creates an
inelastic demand for oil at all levels, thus, any (negative) shock to oil price will fuel higher
consumer and producer prices through increased input costs. In other words, as long as these
structural rigidities remain in the country, discussions on the inflationary effects of oil prices will
remain prominent among policymakers.

2.1.4 A review of monetary policy response to oil price shocks in Nigeria

In Nigeria, the inflationary dynamics arising from oil price shocks and the monetary policy
responses resulted usually in a complex mix of macroeconomic and policy measures to absorb
the external shocks and boost the economic performance of the domestic economy. There are
large and persistent inflationary pressures in the domestic economy arising from the sharp drop
in global oil prices and this often coincides with periods of recessions in the country like in the
US and other countries. Export earnings from oil accounts for an average of 80 percent of total
revenue accrued to the government, 90-95 percent of foreign exchange earnings, and 12 percent
of real Gross Domestic Product(GDP) (Anyanwu, 1995).

The volatility in the world oil prices, therefore, affects Nigeria economic growth through direct
transmission channels that include elevated inflationary pressures from the sharp drop in oil
prices, decline in foreign exchanging earnings that could lead to Exchange Rate Market Pressure
(EMPI), and currency crises, and low output growth. During periods of oil price volatility, the
Nigerian economy has been affected significantly since it is a mono-product economy
dependent, particularly, on the export and import of refined petroleum products. The impact of
oil price shock on the economy became quite destabilizing over the past three decades when the
price of oil was no longer stable like the periods preceding 1973.
The monetary policy response to inflationary pressures arising from the oil price shock, decline
foreign exchange inflows, budget deficit, and economic slowdown has been very critical to the
economic performance of the country’s economy. The extent of monetary policy response can
have a major influence in minimizing the negative impact of oil price shocks on inflation and the
real economy. An appropriate less accommodative monetary policy response can consequently

14
counter the inflationary effects of oil price shocks and improve economic performance. Over the
past few years, the Central Bank Nigeria (CBN) introduced several policy measures to reduce the
inflationary effect of oil shocks in the economy, boost foreign exchange inflows that declined
drastically due to the sharp drop in oil prices, promote sustainable growth and development in
the economy and improve government revenues. The next session presents a review of the recent
monetary policy response of the CBN to oil price shock in Nigeria.

The inflationary pressures arising from the oil price shock, which also resulted in the decline of
foreign exchange inflows and low accretion to foreign reserves, reduced government revenues,
and economic slowdown necessitated the adoption of several unprecedented policy measures by
CBN to counter the increasing negative impact on the economy. In recent times, the Nigerian
economy was faced with several challenges arising largely from the sharp drop in crude oil
receipts, slowdown global growth, and investment flows that caused elevated inflationary and
foreign exchange market pressures. Essentially, the sharp decline in oil prices also coincided
with the relapse of the economy into recession with major negative effects on domestic inflation
and real exchange rate. The CBN was confronted with a significant decline in foreign exchange
reserves from about US$62 billion in September 2008 to US$42.8 billion in January 2014 and to
about US$26.7 billion in June 2016 (CBN report 2016 and 2017). The bank’s monthly foreign
exchange earnings declined considerably from US$3.2 billion to below a billion dollars per
month. Although, there has been an increasing accretion to foreign reserves as a result of the cap
on production by the Organization of Petroleum Exporting

2.1.5 Development of Inflation in Algeria

After years of relatively low inflation, prices began to increase rapidly at the start of 2012. The
inflation rate in Algeria has widely fluctuated between 2003 and 2011, going from a low of -1
percent in 2003 to a high of 7 percent in 2009. At the start of 2012, prices increased again
through April 2012, when inflation peaked at 11 percent. Before 2007, inflation in Algeria was
most of the time lower than in its trading partners; but from 2007 onwards it became higher, with
a large and a widening gap in 2012.
Food inflation has been a major contributor to the recent spike in inflation in Algeria. A simple
decomposition of inflation covering the period 2011–12 shows that the contribution of food in

15
overall inflation increased from 2 percent in late 2011 to almost 8 percent in April, explaining
most of the 2012 spike in inflation. This increase in food inflation was mostly driven by fresh
food. Excluding fresh foods, the CPI increased by at least 1 percent in April 2012 compared to
its level in April, but in May 2012 it began to decline again.
The large demand injected through public spending in a situation of large liquidity has also
provided an enabling environment. Large increases in real wages and other transfers have
translated into higher inflation. Besides, credit to the public sector increased by more than 20
percent in 2012, contributing to inflation pressures, while growth in credit to the private sector
was subdued at 10 percent in 2012.
The authorities stepped in by raising the reserve requirement on deposits in the banking system
from 9 to 11 percent and by enlarging their liquidity absorption by DZD 250 billion (+23
percent), which contributed to a decline in the banking free liquidity (excess reserves in BA and
deposit facilities) in the second and third quarters of 2012.

16
 Algeria Inflation Rate
32

28

24

20

16

12

0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: World development Indicator (WDI)

2.1.6 Trend analysis of Algeria inflation rate
During the past ten years, Algeria succeeded in containing inflation at around 4 percent despite
some spikes in prices in 2004 and 2009, which were mainly due to the rise in international food
and commodity prices. During that period, the central bank used several measures to absorb the
excess liquidity in the banking sector. In particular, it raised the number of deposit auctions;
increased its policy interest rate several times; lengthened the maturities of a large portion of the
deposit auctions from one week to three months in July 2005; and set up an overnight deposit
facility in September 2005. However, inflation increased to an unprecedented level of 11 percent
in early 2012 and has become a real concern for the authorities. The graph above explained the
trend of the inflation rate in Algeria from the year 1970 to 2020. The graph shows that in
Inflation rate in Algeria started experiencing digits more than binary and falls thereafter to binary
digits this trend continue until an immerging shock in 1978 that make Algeria top experienced
the high rate of inflation ever in history. Between the years 1979 to 1990 the average rate of
inflation is 9.859244741. From 1992 to 1995 the rate was worsening as a result of hyperinflation
that occurred in the rate move from 25.8, 31.66, 20.54, 29.04, and 29.7 respectively. This rate
shows that as the oil price is increasing which causes so much revenue accrued top the economy.
Aftermath in which strict measures are taken in place thereby reduces the rate of inflation in

17
Algeria drastically to the dearest minimum level as a result of the procyclical measures in place.
The inflation rate in Algeria is as low as 1.95 in 2019 and 2.41 in 2020.

Nigeria Inflation Rate

80

70

60

50

40

30

20

10

0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: World development Indicator (WDI)

2.1.7 Trend analysis of Nigeria inflation rate

The diagram in figure 1 above showed the trend of inflation in Nigeria between 1970 and 2020.
In 1986 inflation rate was 5.4 percent. This rate was the least of the inflation rate that ever
occurred in Nigeria within the period under review. Since then inflation rate has increased
sharply from 10.2 percent in 1987 to 40.9 percent in 1989. This behavior was the result of the
adverse effect of the depreciation of the naira currency against other international currencies
following the emergence of the structural adjustment program (SAP) in 1986. The inflationary
trend indicates that the inflation rate dropped significantly to 7.5 percent in 1990 but rose sharply
to 57.2 percent in 1993 and sustained this momentum to its highest peak of 72.8 percent in 1995.
Again, it was the depreciated naira currency concerning the dollar and the increased cost of
production reflected in high prices of foodstuff as well as changing prices of imported goods that
triggered up the inflation rate to the highest peak of 72.8 percent in 1995. From 1996, the
inflation rate dropped significantly to 29.3 percent from 72.8 percent in 1995 and this downward
trend was sustained continuously, although with some level of oscillation but not below the

18
minimum rate of 5.4 percent in 2007. Between 2008 and 2011, the inflation rate increased slowly
but steadily from 11.6 percent in 2008 to 13.7 percent in 2010 but decreased to 10.9 percent in
2011. The average rate of inflation between the year 2011 to 2020 was 11.92. The inflationary
trend of Nigeria, as depicted by figure 1 above, simply suggests the macroeconomic instability of
the inflation rate, with an attendant consequence of the low level of investment, sluggish
economic growth rate, and high poverty rate. Besides, the macroeconomic instability of the
inflation rate has widened the gap between the high-income class and low-income earners in
Nigeria. Certainly, the trend analysis supports various sources and theories of inflation as the
reason for the behavior in Nigeria.

2.1.8 World oil price

Oil Prices In our modern world, oil is the second strategic commodity after water (Ayoub, 2002).
It is considered the primary source of energy. Energy in its general sense is the main operator of
global economic activity. It is impossible to imagine factories, farms, houses, hospitals,
transportation, and other activities without using one source or more of energy. Oil is a
significant part of international trade (Mkhalafi, 2011). Oil is the raw material for the
manufacture of at least 11,000 commodities such as fertilizers, rubber, cosmetics, detergents, and
plastics (Mkhalafi, 2011).

As a result of the importance of oil in the economy in general, the fluctuations of oil prices have
great economic effects on importing and exporting countries. Importing countries are positively
affected by the decline in oil prices because they get cheap energy, so, the costs of energy inputs
decline, and the decline falls on final goods, whether they are directly produced by petroleum,
such as petrochemicals, or indirectly, such as agricultural commodities (Al-Khater, 2015). Oil in
the exporting countries is considered the main source of the most important macro and
microeconomic indicators depending on the diversity of the economies of these countries
(Ayoub, 2002).

19
 100

90

80

70

60

50

40

30

20

10
1990 1995 2000 2005 2010 2015 2020

Source: U.S. energy information administration (WTI)

The importance of the world oil prices in this study is due to the continuous fluctuations in the
world oil prices. The graph above shows that the oil price fluctuates dramatically over the years
from 1986 to 2020’ the lowest in the year 1998 due t the Asia financial crisis. The Asian
financial crisis resulted in low demand for oil, accumulating oil surplus which caused a fall of
the prices to an average of $12.28 per barrel. In the year 2020, OPEC cut its production of oil
and increases oil prices to about $27.6 per barrel, nonetheless, the oil price fell once again in the
following year. However,from 2002 to the beginning of 2008, oil prices flourished and reached
$94.1 per barrel. In Mid 2008, oil prices dropped again and reached $60.86 per barrel by 2009
reflecting the World Financial Crisis. Oil prices started recovering after the World Financial
crisis and reached a maximum of $109.45 per barrel In 2012, but stated to declining afterward
reaching $96.29 in 2014 which was explained due to the rapid growth of oil non-OPEC countries
as Baffes et al (2015) show in their study of The Great Plunge in Oil Prices: Causes,
consequences, and Policy responses.

20
2.2 The theoretical review
2.2.1 Structuralist theory of inflation.
The concept of the structural theory of inflation is discussed by Myrdal (1968) and Streeten
(1972) for the first time (Canavese, 1982). The theory explains inflation in the least developed
countries (LCDs) in terms of the structural features of the countries. Both Streeten and Myrdal
(Canavese, 1982) have argued against the direct application of the orthodox aggregative analysis
to the LDCs. The orthodox aggregative analysis assumes the existence of balanced and
integrated structures in the economy where production, consumption, backward and forward
linkages in response to market signals are reasonably smooth and fast, such that it is rational to
talk in terms of aggregate demand 8 and aggregate supply.

However, the majority LDCs are characterized by an unstable economy, backward agriculture,
weak institutions, underutilization of natural resources, and frequent war, etc. Because of this, it
is difficult to apply aggregative analysis to the LDCs. Structuralists believe that inflation in
LDCs is bound with developmental effort and structural response to this effort is expressed
through gaps of various kinds in these countries. The gaps that have been mentioned in the
literature are the Resource gap, food bottleneck, foreign exchange bottleneck, and infrastructural
bottleneck. They suggest that, to understand the true nature of inflation in LDCs one must
identify the determinants that force to generate bottlenecks of various kinds in the normal
process of development, study how the bottlenecks lead to price increases, and how these
increases spread to the whole economy. Since Ethiopia is one of the least developed countries,
the structuralist theory and suggestion hold in Ethiopia too.

2.2.2 Cost-push inflation theory

Cost-push inflation occurs when overall prices increase due to increases in the cost of wages
enforced by trade unions and the cost of production. This type of inflation was identified during
the medieval period, but it was reviewed in the 1950s and 1970s as the main cause of inflation.
There are many causes of cost-push inflation. High increment of wages more rapidly than the
productivity of labor is one of them. Trade unions push employers to increase wages
considerably, thereby raising the cost of production of commodities. Consequently, employers

21
increase the price of their commodities. Even if the wage is increased, the workers would buy
only as much as before because of the price adjustment on products by the producer(Totonchi,
2011). Once again, the trade unions demand higher wages, and the producer will set a higher
price. This vicious circle process leads to cost-push or wage inflation. Another cause of cost-
push inflation is profit push inflation. To maximize their profits, Oligopolist and monopolist
firms charge high prices for their products to offset production and labor costs. Because of the
nature of oligopolist and monopolist markets, firms are in charge of setting the price of their
products: that is why profit-push inflation is also called price-push inflation (Jalil, 2011).

2.2.3 Demand-pull inflation theory

Demand-pull inflation is the upward pressure on prices as a result of the increase in aggregate
demand. John Maynard Keynes and his followers emphasized the increase in aggregate demand
as the source of demand-pull inflation (Totonchi, 2011). The aggregate demand consists of
investment, consumption, and government expenditure. Inflation arises when the value of
aggregate demand exceeds the value of aggregate supply at the full employment level.
Keynesians did not deny this fact that even before reaching full employment production factors
and various constraints can cause an increase in public price. According to Keynesians
(Totonchi, 2011), the policy that causes a decrease in each component of total demand is
effective in the reduction of pressure-demand and inflation.

2.2.4 New political macroeconomics of inflation

The theories discussed above mainly focus on macroeconomic determinants of inflation.
However, these theories ignored the role of non-economic factors such as political instability and
culture as a cause of inflation. The new political economy theory literature provides a new
perspective on the relations between the timing of elections, the performance of policymakers,
political instability, and inflation (Totonchi, 2011). Government officials use their power to
increase government expenditure, especially at the end of their term. Several studies have been
done regarding the non-monetary variables on inflation. For example, KhaniHoolari et al. studied
the effect of Governance and Political Instability on inflation in Iran by using annual time series
data from 1959- 2010 (Seyed, Abbas & Abounoori, 2014). They compute polity, cabinet change,
and government crisis variables as regressors and inflation as a response variable. According to

22
their result, these non-monetary variables significantly affect inflation in Iran. Finally, we can
conclude inflation is not only a monetary phenomenon.
2.2.5 Quantity theory of money (QTM)
States that money supply and price level in the economy are directly proportional to one another.
Irving Fisher showed the relationship between them as follows: M*V= P*T 10 Where M is
Money supply V is Velocity of money p is price level T is Volume of the transactions. In the
above relationship, the velocity of money is assumed to be constant. When there is an increment
in money supply, the price will adjust by the same or lower proportion rate immediately.

2.3 Methodological review

Iya and Aminu (2014) examined the determinants nof inflation in Nigeria for the period 1980 to
2012. The properties of time series variables were examined through the use of OLS, Augmented
Dickey-Fuller technique in testing the unit root property of the series and Granger causality test
of causation between inflation and money supply, government expenditure, exchange rate, and
interest rate, cointegration and vector error correction techniques was also employed.

In the work of Alenxander et al., (2015) who the analysis of the main determinants of inflation in
Nigeria for the period of 1986 to 2011. The study make use of vector autoregressive model and
granger causality test using rate of inflation as the dependent variable while real gross domestic
product, money supply, lending rate, interest rate, fiscal deficit, exchange rate and agricultural
output as the independent variables.

Mohamed et al., (2018) the study examined the determinants of the Algeria Economy for the
period 1970 to 2016. The study employed autoregressive distributed lag approach using gross
domestic product, broad money outside banks, Consumer price index (CPI) and Imports.received
from the rest of the world.

Ahmed (2018) study inflation in Algeria for the period 1980 – 2012. The study make used of
inflation as the dependent variable while imports price, oil price, money stock, government
expenditure and effective nominal exchange rates as the independent variables.the study make
used of auto regressive distributed lag (ARDL) approach in analyzing the data.

23
Jongwanich et al., (2019) examined the consumer price inflation in emerging Asia countries
during 2000-2015. The study make used of variance decomposition method. The study make
used oil, metals, food, nominal exchange rate, import prices, output gap, producer price index
and consumer price index Variables.

Ahmed et al., (2020) examined the asymmetric evaluation of oil price – inflation nexus
evidence from Nigria covering the period of 2009Q1 and 2019Q4. The study male used of Non
linear auto regressive distributed lag (NARDL) . The study make used of consumer price index
as the dependent variables while oil price as the independent variables.

2.4 Empirical review

Olatunji et al., (2010) examines the factors affecting inflation in Nigeria. Time-series data were
employed for the study. It was observed that there were variations in the trend pattern of the
inflation rate. Some of the variables considered were significant in determining inflation in
Nigeria. The previous total export was found to have a negative impact on current inflation while
the previous total import exerts a positive effect likewise the food price index. It has thus been
recommended that policies that will set the interest rate to a level at which it will encourage
investment and increase in production level could be institutionalized, importation should be
reduced in Nigeria such that it will not encourage change of consumer taste resulting in inflating
prices, exchange rate system should be maintained at a level that will not impose a threat on the
Nigeria economy and the domestic consumption of petroleum product should be focused, not
only exportation

Wu and Ni (2011) investigate the relationships among oil prices, inflation, interest rates, and
money. The monetary policy might take time to be effective, so the concerns of lag-chosen
issues will be vital issues from the aspect of this research. Then, different lag-chosen criteria and
symmetric and asymmetric lag-lengths chosen are placed in a stressed situation in this study
concerning monetary lag concerns. They found out that the empirical results are quite robust
concerning various lag-chosen criteria, symmetric and asymmetric models, and different time

24
series models. So, it implies that monetary policies still matter after accounting for the oil prices,
the energetic variable, with the above robustness concerns.

Toumache et al., (2014) empirically analyzed the relationship between oil prices and inflation.
Given that Oil price is crucial to Algeria as a country it was discovered that inflation is a
widespread phenomenon hitting all economic segments in Algerian. In this way, numerous
efforts were provided by the Algerian state to monitor inflation peaks, which fell from their 31%
level between 1992 and 2000. The study shows that there is a lack of a causality between oil
prices and inflation, Impulse response functions found the inexistence of any impact of oil prices
on inflation. Inflation reacts independently to oil prices.

Jawan (2016), studied the causes of inflation across main oil-exporting countries specifically
(Algeria, Nigeria, Iran, Saudi Arabia, and Venezuela). The result shows that high inflation is
associated with the oil price, low money growth, high exchange rate, and low population growth.
The results show that the main determinants of inflation for Algeria and Nigeria arise from
exchange rate variations, whereas the determinants of inflation for Iran are from monetary
factors, demand-side factors, and the exchange rate.

Banikhalid, (2017) determined the impact of oil prices on the G7 inflation rate, and examining
the nature of that impact, whether negative or positive, if existed, during the period from
November 1986 to October 2016. The study found that there is a statically significant impact of
the oil prices on the G7 inflation rate and that the relationship between the two variables is not
linear: the rate of inflation is affected by oil pricesat price levels below (34.5)$ per barrel
negatively. And after this level, the relationship turns positive.

Dahiru and Sulong (2017) examined the long-run relationships between exchange rate, broad
money supply, gross domestic product, interest rate, financial instability, oil price, and inflation.
The findings derived from this study confirmed the existence of a long-run relationship between
the variables tested. Besides that, the findings also showed the existence of a positive long-run
relationship between the exchange rate, broad money supply, oil price, and inflation; but
negatively related to financial instability, interest rate, gross domestic product, and broad money

25
supply nominal effective exchange rate irritation term. Conclusively, throughout the overall
findings, it is recommended for monetary authority in Nigeria to pursue price stability either
through monetary policy or exchange rate target since shocks in both money supply and
exchange rate influence variation in inflation.

Choi et al. (2018) showed that the oil price makes a significant contribution to inflation in oil-
importing countries. Although there is literature available on the relationship between oil price
shocks and inflation for oil-importing countries, the impact of the oil price on inflation in oil-
producing countries has been less studied. For example, Abounoori et al. (2014) showed that the
oil price has a positive effect on the inflation rate in Iran. Brini et al. (2016) illustrated that a
positive oil price shock has a negative impact on inflation for the MENA oil-exporting countries
including Iran, Algeria, and Saudi Arabia while the increase in oil price led to inflation in the
MENA oil-importing countries, including Morocco. However, inflation in Tunisia as an oil-
importing country was not affected by an oil price shock. Thus, the effect of oil price on inflation
is mixed.

Ngan and Tran (2018) analyze the effectiveness of monetary policy transmission channels in
restraining inflation in the case of Vietnam for 2001-2015. In additional, the results suggest the
interest rate channel has a perverse effect on inflation in the long run, which means that the
inflation rate increases with the policy rate. There is also a significant short-run causal
relationship between credit growth to inflation and from the policy rate to inflation. However,
empirical results fail to confirm the existence of a relationship between the exchange rate
channel and inflation in both the short-run and long-run.

Okoye et al. (2019), identified the major factors that cause inflation in Nigeria. The study shows
empirical support for the significant impact of external debt, exchange rate, fiscal deficits, money
supply, and economic growth on inflation. It further shows the previous period or lagged
inflation rate as a significant determinant of the current inflation rate. However, the study
produced no evidence of the significant long-run impact of interest rates on the rate of inflation
in Nigeria.

26
Abonazel and Elnabawy (2020) studied the dynamic causal relationships between inflation rate,
foreign exchange rate, money supply, and gross domestic product (GDP) in Egypt.The study
investigate whether a long-run equilibrium relationship exists between the inflation rate and three
determinants (foreign exchange rate, money supply, and GDP). The results indicate that the
exchange rate and the growth in money supply have significant effects on the inflation rate in
Egypt, while the real GDP has no significant effect on the inflation rate

Stephen et al. (2020) investigated the combined impacts of oil revenue and inflation on the
economic growth of Nigeria.The study incorporate selected monetary policy measures in the
model to fit into the country’s inflationary scenario amidst dwindling oil revenue in recent times.
The empirical result provides evidence that both oil revenue and inflation exert significant
diametric impacts on economic growth in Nigeria. While the former demonstrates a positive
impact on growth the latter has a negative impact within the period of the study (1981-2017).
The Granger Causality test also provides complimentary evidence of causality from both oil
revenue and monetary policy measures to growth.

Gadisa and Robera (2021), examined the determinants of inflation in Ethiopia. The augmented
Dickey-Fuller unit root test indicated that the variables are integrated of order one. However, the
variables transformed to stationary by taking the first difference. There exist a long-run
relationship between variables. Furthermore, the result shows that there is a positive and
significant relationship between inflation, budget deficit, and national debt. However, the effect
of money supply on inflation is only in the short run. Finally, the model is stable if a shock
happens in the future.

27
 CHAPTER THREE

Research Methodology
3.0 Introduction

To examine the determinants of inflation in oil-producing countries in African. This chapter

discuss the research design adopted, sources and method of collection, model specification,
justication of the model and the estimation techniques that suite in achieving the objective of the
study.

3.1 Research design

This study adopts an ex-post facto research design; this is simply because it attempts to explore
the causal relationship to make predictions based on existing data. It will also help to provide
answers to three of the research questions raised and to control the effect of unwanted variance.
Autoregressive Distributed Lag (ARDL), and Augmented Dickey-Fuller test (ADF) method were
employed. The justification for this is that the ARDL method helps to integrate time series which
are stationary at levels and first difference.

3.2 Sources and method of data collection

The data for this study was obtained mainly from secondary sources; specifically World
Development Indicators (WDI), International Financial Statistics (IFS), and Central bank of
Nigeria (CBN) statistical bulletin. The data for this study covers thirty (35) years from 1986-
2020.

3.3 Model specification

The model adopted in this study is an extension of that used by Okoye et al,(2019) to investigate
factors that cause inflation in Bangladesh. The model in Okoye et al, (2019) is presented below:
INF = f(EXD, EXR, GDP, IR, FD, MS)
The economic relationship is explicitly presented as:
INF = β0+ β1EXD+ β2EXR+ β3DP + β4IR + β5FD+ β6MS + εt
where INF – inflation rate, EXD- External Debt, EXR- Exchange rate, GDP- Gross Domestic
Product, IR- Interest rate, FD- Fiscal Deficit, MS- Money Supply, β 0 ,,,,,,, β6 – parameters to be
estimated and εtStochastic variable or error term.

28
The above model was extended to capture the main revenue source of the two countries under
consideration and the management of their fiscal and monetary policy in policy formulation. The
model was extended with the introduction of oil prices and replacement of fiscal deficit with
importation of goods and services to capture the main source of revenue for the two countries.
Therefore the extended model is stated as:
INF= β0+ β1EXD+ β2EXR+ β3DP + β4IR + β5IM+ β6MS+ β7 OIL + εt
where
INF – inflation rate
EXD- External Debt
EXR- Exchange rate
GDP- Gross Domestic Product
IR- Interest rate
IM- Importation
MS- Money Supply
Oil- Oil price
β0,,,,,,,β7– parameters to be estimated and
εtStochastic variable or error term.

3.4 Theoretical justification for the model

The structural theory of inflation provides a theoretical link between the dependent variable
(inflation)and external debt, importation of goods and services and money supply. According to
the theory, the existence of structural imbalance in the economic, social, and political systems in
a developing economy creates a mismatch between output and money supply. Developing
economies are characterized by underemployment of resources (idle capacity), which according
to classical theory (MV = PQ) are exploited when money supply (M) is increased to bring the
model to equality. However, owing to structural defects, the rate of output (Q) growth in
developing economies does not match the rate of monetary growth, leading to inflation. In line
with the structural theory of inflation, external debt acquisition (EXD), importation of goods and
service (IM), and broad money supply (M2) correlate positively with inflation (INF) owing to a
less proportionate response of output. This implies that the rate of inflation is increased when
these variables increase.

29
The link between the exchange rate and the inflation rate is also explained by the structuralists
who argue that the non-competitiveness of developing countries’ exports creates foreign
exchange constraints, which impair their capacity to import essential production inputs, leading
to sluggish output growth. They further argue that even when these economies adopt currency
devaluation to enhance foreign exchange inflow through increased export, the prices of imported
inputs rise simultaneously, thereby fueling inflationary pressure. Note that developing economies
export primary products and import industrial, processed and semi-processed products.

The nexus between economic growth and inflation, according to Svirgir and Milos (2017), is
complex and could be positive, negative, or even neutral. However, following the work of
Phillips (1958), a negative association is established between the inflation rate and the
unemployment rate, an indication that economic policies aimed at reducing unemployment raise
the rate of inflation. Increased employment, therefore, leads to output growth.

Like the exchange rate, the interest rate is a price variable. High-interest rates on loans raise the
cost of production, which manifests as high prices of output, leading to cost-push inflation. Also,
the oil price increase will lead to increase in government revenue as such government spending
will rise thereby leading to inflation, that is we expect a diarect relationship between oil price
and inflation in the two countries.

3.5 Estimation techniques

This study is interested in the short run, long run, and predictive determinants of inflation in
Nigeria and Algeria. The estimation techniques are divided into pre-estimation, estimation test,
and post-estimation test. The preliminary tests include descriptive statistics and unit root to test.
The estimation tests include the bound test to determine the existence of cointegration equation
and auto regressive distribution lag (ARDL) to test the existence of long run and short run
relationship while the Error correction model determines the path of adjustment back to the
equilibrium in the short run. Post estimation test is conducted to test for normality, linearity,
serial correlation, heteroscedacity and cusum test to determine the stability test.

30
3.5.1 Unit root test
This is the pre Co-integration test. It is used to determine the order of integration of a variable
that is how many times it has to be differenced or not to become stationary. It is used to check
for the presence of a unit root in the variable i.e whether the variable is stationary or not. The
null hypothesis is that there is no unit root. This test is carried out using the Augmented Dickey
Fuller (ADF) technique of estimation. The rule is that if the ADF test statistic is less than the 5%
critical value we accept the null hypothesis i.e the variable is not stationary or have a unit root.
But if the ADF test statistic is greater than the 5% critical value, we reject the null for alternative
i.e the variable is stationary or have no unit root. However it is expected that the variable
becomes stationary at first difference.
Y = QYt-1 + Et
Where Et is a white noise process and the stationary condition is |Q| < 1.
In general we can have three possible cases:
Case 1: |Q| < 1 and therefore the series is stationary
Case 2: |Q| > 1 where in this case the series explodes.
Case 3: |Q| = 1 where in this case the series contains a unit root and is non-stationary.

3.5.2 Optimal lag selection decision

Too many lags lead to loss of degrees of freedom and this can cause multicollinearity,
serialcorrelation in the error terms and misspecification errors. The easiest way is to decide using
acriterion like the Akaike or Schwarz. The rule-of-thumb is to choose the model that gives
thelowest values of these criteria.

3.5.3 Autoregressive distributed lag (ardl) and bound test

The ARDL technique was employed to obtain numerical values of the model coefficient. The
probability of the t-test statistics will be used to evaluate the estimated numerical values of the
coefficients of the regression for statistical significance at 5% level. The strength of the variables
in predicting the determinants of inflation in Nigeria and Algeria will be evaluated based on the
R square and adjusted R-square. To check for robustness of the statistical relevance of the model,
Wald test will be used.

The bound test is stated below

31
∆INFt= β0+ β1INFt-i+ β2EXDt-i+ β3EXRt-i+ β4DPt-i + β5IRt-i + β6IMt-i + β7MSt-i + β8OILt-I +

∑ i=1a1i∆INFt-i+∑ i=1a2i∆EXDt-i+∑
p q z
a ∆EXRt-i +∑
i=1 3i
z
a ∆DPt-i +∑
i=1 4i
z
a ∆IRt-i + ∑
i=1 5i
z
a ∆IMt-i
i=1 6i

+∑zi=1a7i∆MSt-I +∑zi=1a8i∆OILt-i e1t

Rule of thumb of Bound Test:

Fstatistics>I(0) and I(1) at 5%; then there is cointegration, otherwise, no cointegration.

3.5.4 Post estimation

This is used to test for the robustness of the model and variable used in this study. To determine
the linearity of the model we make used of Ramsey reset. The null hypothesis state that the
model is not linearly specify while the alternative state that the model is linearly specify.
Jarquebera test is used to examine the normality of the model while heteroscedacity test is used
to confirm the existence of constant variance and mean. To test for the existence of non auto
correlation Breusch-Godfrey Serial Correlation LM Test is conducted while cusum and cusum
square test determine the stability of the variables.

Decision criteria: Reject null hypothesis if the prob-value of the F-statistics is ≤ 0.05

Bound test and ARDL-ECM

To check for the inflation determinant in the long run, the bound test will be used while ARDL-
ECM will be used to obtain the long-run numerical values of the model coefficient.
Rule of thumb of Bound Test:
Fstatistics>I(0) and I(1) at 5%; then there is cointegration, otherwise, no cointegration.

32
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION OF THE RESULTS

4.0 Introduction
This chapter shows the analysis of data which includes presentation of results, interpretation of
results, testing of hypotheses and discussion of findings. Panel Data Analysis and Autoregressive
Distributed Lag (ARDL) methodwere adopted for data analysis

4.1 Presentation and interpretation of results

4.1.1 Interpretation of Autoregressive Distributed Lag (ARDL)
The result for the ARDL between inflation rate, exchange rate, gross domestic product, interest
rate, money supply, oil price in Nigeria.The analysis have inflation rate as the dependent variable
and independent variables to be money supply, interest rate, oil, gross domestic product and
exchange rate. The result shows that there is a negative relationship between inflation rate and
money supply and that a unit increase in money supply brings about inflation in the country and
this correlate with the a priori expectation and the Keynesian theory of public spending. As
government pump money into circulation, there will be an increase in purchasing power and this
equally leads to an increase in inflation rate. The result equally shows a negative relationship
with interest rate and this indicates that a unit increase in inflation rate reduces interest rate by
1.147 which implies that when inflation rate is very high, the money losses it value and this
equally affects the interest rate. The table also indicates that there is a negative relationship
between inflation rate, oil, gross domestic product and exchange rate in Nigeria within the scope
covered. The probability value shows that only exchange rate is significant at 5% level of
significance and that other independent variables employed are not significant. Adjusted R
square of 0.635 show that the model captured about 64% of factors that affects inflation rate in
Nigeria and the remaining 36% are others factors that affects inflation rate but were not captured
in the model. The durbinwatson of 2.683376shows that there is positive serial correlation among
the variables employed.

Table 4.1: Autoregressive Distributed Lag (ARDL)

Dependent Variable: INF
Method: ARDL

33
Date: 12/06/21 Time: 12:56
Sample (adjusted): 1988 2020
Included observations: 33 after adjustments
Maximum dependent lags: 2 (Automatic selection)
Model selection method: Schwarz criterion (SIC)
Dynamic regressors (2 lags, automatic): MS IR OIL GDP EXR
ECM  
Fixed regressors: C
Number of models evalulated: 1458
Selected Model: ARDL(2, 0, 0, 0, 0, 1, 0)
Note: final equation sample is larger than selection sample

Variable Coefficient Std. Error t-Statistic Prob.*  

INF(-1) 0.574586 0.151966 3.781016 0.0010

INF(-2) -0.568582 0.151033 -3.764632 0.0010
MS -0.044349 0.127851 -0.346879 0.7318
IR -1.147484 1.180866 -0.971731 0.3413
OIL -0.155652 0.102129 -1.524080 0.1411
GDP -2.056948 0.591520 -3.477393 0.0020
EXR -0.332992 0.134492 -2.475933 0.0211
EXR(-1) 0.285943 0.143826 1.988112 0.0588
ECM -0.059446 0.165970 -0.358174 0.7235
C 54.47376 13.63098 3.996320 0.0006

R-squared 0.738018    Mean dependent var 20.18108

Adjusted R-squared 0.635503    S.D. dependent var 18.14130
S.E. of regression 10.95255    Akaike info criterion 7.870069
Sum squared resid 2759.043    Schwarz criterion 8.323556
Log likelihood -119.8561    Hannan-Quinn criter. 8.022654

34
F-statistic 7.199139    Durbin-Watson stat 2.019168
Prob(F-statistic) 0.000064

*Note: p-values and any subsequent tests do not account for model
        selection.
Source: Eview 10 Author’s Computation

4.1.2 Bounds test to co-integration.

For bounds cointegration test, since the F statistics is greater than the critical value for the bound
test, we conclude that there is cointegration and that there is no long run relationship between the
variables and it is not significant at 5% level of significance. Therefore, we reject the null
hypothesis and accept alternative hypothesis.

Table 4.2: Ardl bounds test

ARDL Bounds Test
Date: 12/06/21 Time: 12:57
Sample: 1988 2020
Included observations: 32
Null Hypothesis: No long-run relationships exist

Test Statistic Value K

F-statistic  0.520044 6

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.12 3.23

5% 2.45 3.61
2.5% 2.75 3.99
1% 3.15 4.43

35
4.1.3 Cointegration and longrun form
The table shows the long run relationship between inflation rate, external debt, exchange rate,
gross domestic product, interest rate, importation, money supply, oil price and it shows that there
is a negative relationship between inflation rate, external debt, exchange rate, gross domestic
product, interest rate, importation, money supply, oil price which means that in the long run all
the variables employed are co integrated and that inflation rate negatively impact all independent
variables employed in Nigeria.Oil, gross domestic product and exchange rate are significant at
5%, 1% and 5% level respectively but other variables are not significant.

Table 4.3: Cointegration and longrun Form

ARDL Cointegrating And Long Run Form
Dependent Variable: INF
Selected Model: ARDL(2, 0, 0, 0, 0, 1, 0)
Date: 12/06/21 Time: 12:57
Sample: 1986 2020
Included observations: 33

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.   

D(INF) 0.568582 0.151033 3.764632 0.0010

D(MS) -0.044349 0.127851 -0.346879 0.7318
D(IR) -1.147484 1.180866 -0.971731 0.3413
D(OIL) -0.155652 0.102129 -1.524080 0.1411
D(GDP) -2.056948 0.591520 -3.477393 0.0020
D(EXR) -0.332992 0.134492 -2.475933 0.0211
D(ECM) -0.059446 0.165970 -0.358174 0.7235
CointEq(-1) -0.993996 0.171991 -5.779343 0.0000

36
    Cointeq = INF - (-0.0446*MS -1.1544*IR -0.1566*OIL -
2.0694*GDP  
        -0.0473*EXR -0.0598*ECM + 54.8028 )

Long Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.   

MS -0.044617 0.125998 -0.354108 0.7265

IR -1.154415 1.217420 -0.948246 0.3529
OIL -0.156592 0.098017 -1.597599 0.1238
GDP -2.069373 0.566778 -3.651114 0.0013
EXR -0.047334 0.032052 -1.476792 0.1533
ECM -0.059805 0.168600 -0.354716 0.7260
C 54.802784 10.881364 5.036389 0.0000

Source: Eview 10 Author’s Computation

4.1.4 Interpretation of autoregressive distributed lag (ARDL) for Algeria

The result for the ARDL between inflation rate, exchange rate, gross domestic product, interest
rate, money supply, oil price in Nigeria. The analysis have inflation rate as the dependent
variable and independent variables to be money supply, interest rate, oil, gross domestic product
and exchange rate. The result shows that there is a negative relationship between inflation rate,
money supply and interest rate in Algeria as well and that a unit increase in money supply brings
about inflation in the country and this correlate with the a priori expectation and the Keynesian
theory of public spending. As government pump money into circulation, there will be an increase
in purchasing power and this equally leads to an increase in inflation rate. The result equally
shows a negative relationship with interest rate and this indicates that a unit increase in inflation
rate reduces interest rate by 0.183 which implies that when inflation rate is very high, the money
losses it value and this equally affects the interest rate. The table also indicates that there is a
positive relationship between inflation rate, oil, gross domestic product and exchange rate in

37
Algeria as well within the scope covered which makes it more similar to Nigeria analysis. The
probability value shows that only interest rate and exchange rate are significant at 5% level of
significance and that other independent variables employed are not significant. Adjusted R
square of 0.80show that the model captured about 80% of factors that affects inflation rate in
Algeria which is more stronger than Nigeria own and the remaining 20% are others factors that
affects inflation rate but were not captured in the model. The durbinwatson of 2.215537 shows
that there is positive serial correlation among the variables employed.

Table 4.4 Autoregressive Distributed Lag (ARDL)

Dependent Variable: INF

Method: ARDL

Date: 12/06/21 Time: 13:14

Sample (adjusted): 1987 2020

Included observations: 34 after adjustments

Maximum dependent lags: 2 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (2 lags, automatic): OIL MS IR GDP EXR  

Fixed regressors: C

Number of models evalulated: 486

Selected Model: ARDL(1, 0, 0, 1, 0, 1)

Note: final equation sample is larger than selection sample

Variable Coefficient Std. Error t-Statistic Prob.*  

INF(-1) 0.750568 0.118692 6.323678 0.0000

OIL 0.031325 0.042370 0.739308 0.4666

38
 MS -3.78E-13 3.70E-13 -1.020544 0.3172

IR -0.183081 0.295538 -0.619485 0.5412

IR(-1) -0.614400 0.249303 -2.464474 0.0209

GDP 0.231580 0.365692 0.633267 0.5323

EXR 0.358745 0.173887 2.063092 0.0496

EXR(-1) -0.309176 0.161383 -1.915788 0.0669

C 3.502866 3.197786 1.095403 0.2838

R-squared 0.853058    Mean dependent var 8.509778

Adjusted R-squared 0.806037    S.D. dependent var 8.908607

S.E. of regression 3.923461    Akaike info criterion 5.793753

Sum squared resid 384.8387    Schwarz criterion 6.197789

Log likelihood -89.49379    Hannan-Quinn criter. 5.931541

F-statistic 18.14193    Durbin-Watson stat 2.215537

Prob(F-statistic) 0.000000

*Note: p-values and any subsequent tests do not account for model

        selection.

Source: Eview 10 Author’s Computation

4.1.5 Bounds Test to Co-Integration.

For bounds cointegration test, since the F statistics is greater than the critical value for the bound
test, we conclude that there is cointegration and that there is no long run relationship between the
variables and it is not significant at 5% level of significance in Algeria. Therefore, we reject the
null hypothesis and accept alternative hypothesis.

39
4.5 Bounds test
ARDL Bounds Test
Date: 12/06/21 Time: 13:14
Sample: 1987 2020
Included observations: 34
Null Hypothesis: No long-run relationships exist

Test Statistic Value K

F-statistic  3.272106 5

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.26 3.35

5% 2.62 3.79
2.5% 2.96 4.18
1% 3.41 4.68

4.1.6 Cointegration and longrun form

The table shows the long run relationship between inflation rate, external debt, exchange rate,
gross domestic product, interest rate, importation, money supply, oil price and it shows that there
is a negative relationship interest rate and money supply which means that in the long run all the
variables employed are co integrated and that inflation rate negatively impact all independent
variables employed in Algeria while GDP and Exchange were positively related.

Cointegration and longrun form

Long run and cointegration
ARDL Cointegrating And Long Run Form

40
Dependent Variable: INF
Selected Model: ARDL(1, 0, 0, 1, 0, 1)
Date: 12/06/21 Time: 13:15
Sample: 1986 2020
Included observations: 34

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.   

D(OIL) 0.031325 0.042370 0.739308 0.4666

D(MS) -0.000000 0.000000 -1.020544 0.3172
D(IR) -0.183081 0.295538 -0.619485 0.5412
D(GDP) 0.231580 0.365692 0.633267 0.5323
D(EXR) 0.358745 0.173887 2.063092 0.0496
CointEq(-1) -0.249432 0.118692 -2.101512 0.0458

    Cointeq = INF - (0.1256*OIL -0.0000*MS -3.1972*IR +

0.9284*GDP +
        0.1987*EXR + 14.0434 )

Long Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.   

OIL 0.125583 0.188955 0.664621 0.5124

MS -0.000000 0.000000 -0.880402 0.3870
IR -3.197191 2.133049 -1.498883 0.1464
GDP 0.928430 1.661829 0.558680 0.5814
EXR 0.198727 0.313228 0.634450 0.5316
C 14.043371 9.445297 1.486811 0.1496

41
Source: Eview 10 Author’s Computation

4.2 Discussion of result

The result shows the analysis for two different countries which are Nigeria and Algeria and the result
shows that over the years, money supply possess a positive relationship with inflation rate and that an
increase in money supply in the economy bring about the increase in the level of inflation and that a
positive relationship also exists between inflation rate and exchange rate. A unit increase in money
supply and exchange rate equally bring about an increase of 0.044617 and 1.332192. Conversely,
negative relationship exists between inflation, interest rate, oil and gross domestic product which
simply depicts that a unit increase in inflation rate decreases interest rate, oil and gross domestic
product by -1.324415, -0.156592 and -2.856948 respectively and that there is long run relationship
between inflation rate, external debt, exchange rate, gross domestic product, interest rate, importation,
money supply, oil price and it shows that there is a negative relationship between inflation rate,
external debt, exchange rate, gross domestic product, interest rate, importation, money supply, oil
price which means that in the long run all the variables employed are co integrated and that inflation
rate negatively impact all independent variables employed in Nigeria. The result shows that there is a
negative relationship between inflation rate and money supply and that a unit increase in money
supply brings about inflation in the country and this correlate with the a priori expectation and the
Keynesian theory of public spending. As government pump money into circulation, there will be an
increase in purchasing power and this equally leads to an increase in inflation rate. The result equally
shows a negative relationship with interest rate and this indicates that a unit increase in inflation rate
reduces interest rate by 1.147 which implies that when inflation rate is very high, the money losses it
value and this equally affects the interest rate. The table also indicates that there is a negative
relationship between inflation rate, oil, gross domestic product and exchange rate in Nigeria within
the scope covered. The probability value shows that only exchange rate is significant at 5% level of
significance and that other independent variables employed are not significant.

42
For the Algeria analysis,The result for the ARDL between inflation rate, exchange rate, gross
domestic product, interest rate, money supply, oil price in Nigeria. The analysis have inflation rate as
the dependent variable and independent variables to be money supply, interest rate, oil, gross
domestic product and exchange rate. The result shows that there is a negative relationship between
inflation rate, money supply and interest rate in Algeria as well and that a unit increase in money
supply brings about inflation in the country and this correlate with the a priori expectation and the
Keynesian theory of public spending. As government pump money into circulation, there will be an
increase in purchasing power and this equally leads to an increase in inflation rate. The result equally
shows a negative relationship with interest rate and this indicates that a unit increase in inflation rate
reduces interest rate by 0.183 which implies that when inflation rate is very high, the money losses it
value and this equally affects the interest rate. The table also indicates that there is a positive
relationship between inflation rate, oil, gross domestic product and exchange rate in Algeria

The result also correlate with Gadisa and Robera (2021), examined the determinants of inflation
in Ethiopia. The augmented Dickey-Fuller unit root test indicated that the variables are integrated
of order one. However, the variables transformed to stationary by taking the first difference.
There exist a long-run relationship between variables. Furthermore, the result shows that there is
a positive and significant relationship between inflation, budget deficit, and national debt.
However, the effect of money supply on inflation is only in the short run. Finally, the model is
stable if a shock happens in the future.

43
 CHAPTER 5

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction
This chapter deals with the summary, conclusion and recommendations of the study. The
summary of the major findings deals with the result of the previous analysis. Also, the
conclusion and recommendations are made and suggestion for further studies

5.1 Summary
Inflation creates uncertainty which discourages savings and investment. Savings are discouraged
as inflation reduces the real rate of return on financial assets. This again leads to low investment
and a declining economic growth. High inflation rate erodes the gains from growth and leaves
the poor worse off thereby increase the divide between the rich and poor in the society. A high
inflation rate result from increase in food prices, it hurts the poor because of their high marginal
propensity to consume (Mohanty and John, 2015). The study adopted Demand-pull inflation is
the upward pressure on prices as a result of the increase in aggregate demand. John Maynard
Keynes and his followers emphasized the increase in aggregate demand as the source of demand-
pull inflation (Totonchi, 2011). The aggregate demand consists of investment, consumption, and
government expenditure. Inflation arises when the value of aggregate demand exceeds the value
of aggregate supply at the full employment level. Keynesians did not deny this fact that even
before reaching full employment production factors and various constraints can cause an increase
in public price.

The result shows the analysis for two different countries which are Nigeria and Algeria and the
result shows that over the years, money supply possess a positive relationship with inflation rate
and that an increase in money supply in the economy bring about the increase in the level of
inflation and that a positive relationship also exists between inflation rate and exchange rate. A
unit increase in money supply and exchange rate equally bring about an increase of 0.044617 and
1.332192. Conversely, negative relationship exists between inflation, interest rate, oil and gross
domestic product which simply depicts that a unit increase in inflation rate decreases interest
rate, oil and gross domestic product by -1.324415, -0.156592 and -2.856948 respectively and that
there is long run relationship between inflation rate, external debt, exchange rate, gross domestic

44
product, interest rate, importation, money supply, oil price and it shows that there is a negative
relationship between inflation rate, external debt, exchange rate, gross domestic product, interest
rate, importation, money supply, oil price which means that in the long run all the variables
employed are co integrated and that inflation rate negatively impact all independent variables
employed in Nigeria.

5.2 Conclusion
Having examined the determinant of inflation in oil producing countries in Africa (A case study
of Algeria and Nigeria) and how it affects economic growth over the years. The study concluded
that the positive inflation rate, exchange rate, gross domestic product, interest rate, money
supply, oil price in Nigeria. The analysis have inflation rate as the dependent variable and
independent variables to be money supply, interest rate, oil, gross domestic product and
exchange rate. The result shows that there is a negative relationship between inflation rate,
money supply and interest rate in Algeria as well and that a unit increase in money supply brings
about inflation in the country and this correlate with the a priori expectation and the Keynesian
theory of public spending.

5.3 Recommendations
Based on the findings of the result, the following recommendations were made:
The economy should be less import dependent but rather be more productive and export
oriented. This will leads to favourable balance of payment in the country and thereby leading to
economic growth in the country. When Country import less and export more, the country tends
to enjoy the benefit of globalization more. Any country that depends on foreign goods or where
import exceed export can never experience rapid growth in their economy. Therefore, Nigeria as
a country should try and import less and improve on all sectors especially crude oil sector in
order to export more which will bring out economic growth in the country.

The Central Bank of Nigeria should put in place a strict foreign exchange policy control to
ensure that the value of Naira against other currency is properly determined. Unethical practices
by banks leading depreciation of the Naira should be investigated and erring operators
sanctioned accordingly.Government should stimulate export diversification in the area of

45
agriculture, mining of earth resources, oil allied industries, agro-allied industries and agro-
investment, which will improve Foreign Exchange Earnings on Real growth in Nigeria
Economy.

Nigerian government should continue to implement fiscal and monetary policies that would
reduce overreliance on the foreign goods so as to bring about economic stability and self-reliant
development in the country

Increase in Government Spending to crude oil sector will also brings about economic
development in the country and reduce the level of unemployment in the country. When
government spend more on crude oil sector by reviving dilapidated refineries, it will reduce the
level of unemployment in the country and also leads to economic growth in the country.

5.4 Suggestions for further studies

The study investigated the determinant of inflation in oil producing countries in Africa (A case
study of Algeria and Nigeria). Therefore, there is need for further studies to be carried out in
these following areas;
 The effect of globalization on Nigeria economic growth; empirical evidence from oil sector
 The impact of oil price volatility on economic growth in Nigeria

46
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49
 APPENDICES
Autoregressive Distributed Lag (ARDL)
Dependent Variable: INF
Method: ARDL
Date: 12/06/21 Time: 12:56
Sample (adjusted): 1988 2020
Included observations: 33 after adjustments
Maximum dependent lags: 2 (Automatic selection)
Model selection method: Schwarz criterion (SIC)
Dynamic regressors (2 lags, automatic): MS IR OIL GDP EXR
ECM  
Fixed regressors: C
Number of models evalulated: 1458
Selected Model: ARDL(2, 0, 0, 0, 0, 1, 0)
Note: final equation sample is larger than selection sample

Variable Coefficient Std. Error t-Statistic Prob.*  

INF(-1) 0.574586 0.151966 3.781016 0.0010

INF(-2) -0.568582 0.151033 -3.764632 0.0010
MS -0.044349 0.127851 -0.346879 0.7318
IR -1.147484 1.180866 -0.971731 0.3413
OIL -0.155652 0.102129 -1.524080 0.1411
GDP -2.056948 0.591520 -3.477393 0.0020
EXR -0.332992 0.134492 -2.475933 0.0211
EXR(-1) 0.285943 0.143826 1.988112 0.0588
ECM -0.059446 0.165970 -0.358174 0.7235
C 54.47376 13.63098 3.996320 0.0006

R-squared 0.738018    Mean dependent var 20.18108

50
Adjusted R-squared 0.635503    S.D. dependent var 18.14130
S.E. of regression 10.95255    Akaike info criterion 7.870069
Sum squared resid 2759.043    Schwarz criterion 8.323556
Log likelihood -119.8561    Hannan-Quinn criter. 8.022654
F-statistic 7.199139    Durbin-Watson stat 2.019168
Prob(F-statistic) 0.000064

*Note: p-values and any subsequent tests do not account for model
        selection.
Source: Eview 10 Author’s Computation

ARDL BOUNDS TEST

ARDL Bounds Test
Date: 12/06/21 Time: 12:57
Sample: 1988 2020
Included observations: 32
Null Hypothesis: No long-run relationships exist

Test Statistic Value K

F-statistic  0.520044 6

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.12 3.23

5% 2.45 3.61
2.5% 2.75 3.99
1% 3.15 4.43

51
Cointegration and longrun Form
ARDL Cointegrating And Long Run Form
Dependent Variable: INF
Selected Model: ARDL(2, 0, 0, 0, 0, 1, 0)
Date: 12/06/21 Time: 12:57
Sample: 1986 2020
Included observations: 33

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.   

D(INF) 0.568582 0.151033 3.764632 0.0010

D(MS) -0.044349 0.127851 -0.346879 0.7318
D(IR) -1.147484 1.180866 -0.971731 0.3413
D(OIL) -0.155652 0.102129 -1.524080 0.1411
D(GDP) -2.056948 0.591520 -3.477393 0.0020
D(EXR) -0.332992 0.134492 -2.475933 0.0211
D(ECM) -0.059446 0.165970 -0.358174 0.7235
CointEq(-1) -0.993996 0.171991 -5.779343 0.0000

    Cointeq = INF - (-0.0446*MS -1.1544*IR -0.1566*OIL -

2.0694*GDP  
        -0.0473*EXR -0.0598*ECM + 54.8028 )

Long Run Coefficients

52
 Variable Coefficient Std. Error t-Statistic Prob.   

MS -0.044617 0.125998 -0.354108 0.7265

IR -1.154415 1.217420 -0.948246 0.3529
OIL -0.156592 0.098017 -1.597599 0.1238
GDP -2.069373 0.566778 -3.651114 0.0013
EXR -0.047334 0.032052 -1.476792 0.1533
ECM -0.059805 0.168600 -0.354716 0.7260
C 54.802784 10.881364 5.036389 0.0000

Source: Eview 10 Author’s Computation

Autoregressive Distributed Lag (ARDL)

Dependent Variable: INF

Method: ARDL

Date: 12/06/21 Time: 13:14

Sample (adjusted): 1987 2020

Included observations: 34 after adjustments

Maximum dependent lags: 2 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (2 lags, automatic): OIL MS IR GDP EXR  

Fixed regressors: C

Number of models evalulated: 486

Selected Model: ARDL(1, 0, 0, 1, 0, 1)

Note: final equation sample is larger than selection sample

Variable Coefficient Std. Error t-Statistic Prob.*  

53
 INF(-1) 0.750568 0.118692 6.323678 0.0000

OIL 0.031325 0.042370 0.739308 0.4666

MS -3.78E-13 3.70E-13 -1.020544 0.3172

IR -0.183081 0.295538 -0.619485 0.5412

IR(-1) -0.614400 0.249303 -2.464474 0.0209

GDP 0.231580 0.365692 0.633267 0.5323

EXR 0.358745 0.173887 2.063092 0.0496

EXR(-1) -0.309176 0.161383 -1.915788 0.0669

C 3.502866 3.197786 1.095403 0.2838

R-squared 0.853058    Mean dependent var 8.509778

Adjusted R-squared 0.806037    S.D. dependent var 8.908607

S.E. of regression 3.923461    Akaike info criterion 5.793753

Sum squared resid 384.8387    Schwarz criterion 6.197789

Log likelihood -89.49379    Hannan-Quinn criter. 5.931541

F-statistic 18.14193    Durbin-Watson stat 2.215537

Prob(F-statistic) 0.000000

*Note: p-values and any subsequent tests do not account for model

        selection.

Source: Eview 10 Author’s Computation

54
Bounds test
ARDL Bounds Test
Date: 12/06/21 Time: 13:14
Sample: 1987 2020
Included observations: 34
Null Hypothesis: No long-run relationships exist

Test Statistic Value K

F-statistic  3.272106 5

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.26 3.35

5% 2.62 3.79
2.5% 2.96 4.18
1% 3.41 4.68

Cointegration and longrun form

Long run and cointegration
ARDL Cointegrating And Long Run Form
Dependent Variable: INF
Selected Model: ARDL(1, 0, 0, 1, 0, 1)
Date: 12/06/21 Time: 13:15
Sample: 1986 2020
Included observations: 34

Cointegrating Form

55
 Variable Coefficient Std. Error t-Statistic Prob.   

D(OIL) 0.031325 0.042370 0.739308 0.4666

D(MS) -0.000000 0.000000 -1.020544 0.3172
D(IR) -0.183081 0.295538 -0.619485 0.5412
D(GDP) 0.231580 0.365692 0.633267 0.5323
D(EXR) 0.358745 0.173887 2.063092 0.0496
CointEq(-1) -0.249432 0.118692 -2.101512 0.0458

    Cointeq = INF - (0.1256*OIL -0.0000*MS -3.1972*IR +

0.9284*GDP +
        0.1987*EXR + 14.0434 )

Long Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.   

OIL 0.125583 0.188955 0.664621 0.5124

MS -0.000000 0.000000 -0.880402 0.3870
IR -3.197191 2.133049 -1.498883 0.1464
GDP 0.928430 1.661829 0.558680 0.5814
EXR 0.198727 0.313228 0.634450 0.5316
C 14.043371 9.445297 1.486811 0.1496

Source: Eview 10 Author’s Computation

56