Analyzing inflation in Nigeria: a fractionally integrated ARFIMA-GARCH modelling Approach
DOI:
https://doi.org/10.61538/ajer.v6i1.408Abstract
The study looked into the stochastic properties of CPI-inflation rate for Nigeria from 1995Q1 to 2016Q4. The study employed an autoregressive fractionally integrated moving average and a general autoregressive conditional heteroskedasticity (ARFIMA-GARCH) methodology as well as ADF/KPSS to investigate the long-memory properties of CPI-Inflation for Nigeria. The study found that CPI-inflation in Nigeria is shock dissipating at a geometric rate (fast mean reverting ability). The ARFIMA-GARCH process showed that CPI inflation in Nigeria is a heteroskedastic fractionally integrated process with quick mean reverting ability. The study therefore concludes that shocks to CPI-inflation in Nigeria such as sudden hikes in prices of energy products will not cause a permanent change in general price level but will eventually return to its mean state, and therefore having an implication for the Inflation-Unemployment tradeoff of the Philips curve.References
Adebiyi, M. A., Adenuga, A. O., Abeng, M. O., Omanukwe, P. N., and Ononugbo, M. C. (2010): Inflation forecasting models for Nigeria. Central Bank of Nigeria Occassional Paper No. 36, Abuja, Research and Statistics Department.
Akani, H.W and Uzobor, (2015) “Empirical analysis of effects of inflation on aggregate stock prices in Nigeria: 1980-2012†European Journal of Accounting, Auditing and Finance Research Vol. 3(9) pp.31-51
Akdogan, K., Beser, S., Chadwick, M.G., Ertug, D., Hulagu, T., Kosem, S., Ogunc, F., Ozmen, M.U and Tekalti, N. (2012). Short-term Inflation Forecasting Models for Turkey and a Forecast Combination Analysis, Turkiye Cumhuriyet Merkez Bankasi Working Paper No 12/09.
Alnaa, S.E. and Ferdinand A. (2011). ARIMA approach to predicting inflation Ghana. J. Econ. Int. Finance, 3(5): 328-336.
Apergis, N., Christou, C., Payne, J.E., and J.W. Saunoris (2015). ‘The change in real interest rate persistence in OECD countries: Evidence from Modified Panel Ratio Tests’. Journal of Applied Statistics 42, 202-213.
Awomuse, B. and Alimi, R. S. (2012). Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Nigeria. Akungba Journal of Management, 4(1)
Bailie, R.T., Chung, C. and Tieslau, M. A (1996) “Analyzing Inflation by the Fractionally integrated ARFIMA-GARCH Model†Journal of applied econometrics, Vol.11 23-40
Bakare H., Kareem R. and Oyelekan O. (2015). Effects of Inflation Rate on Economic Growth in Nigeria (1986-2014). Developing Country Studies. 5(8), 153-160
Bamanga, M. A., Musa, U., Salihu, A., Udoette, U.S., Adejo, V.T., Edem, O. N., Bukar, H., and Udechukwu-Peterclaver, C.T. (2016). Inflation and inflation uncertainty in Nigeria: A test of the Friedman’s hypothesis.CBN Journal of Applied Statistics, 7 (1a), 147-169.
Chimobi, O.P. (2010) Inflation and Economic Growth in Nigeria. Journal of Sustainable Development, 3(2), 159-166
Chowdhury, A. (2011). Inflation and inflation-uncertainty in India: the policy implications of the relationship, Journal of Economic Studies, 41(1),71-86.
Crowder, W. J., and Hoffman, D. L. (1996). ‘The Long-run Relationship between Nominal Interest Rates and Inflation: the Fisher Equation Revisited’. Journal of Money, Credit and Banking, 28, 102-118.
Dickey, D.A. and Fuller, W.A. (1981), "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root", Econometrica, Vol. 49, pp. 1057-1072
Doguwa, S. I. and Alade, S. O. (2013): Short-term Inflation Forecasting Models for Nigeria. CBN Journal of Applied Statistics, 4 (2), 1-29.
Doguwa, S.I (2014) “Inflation and Economic growth in Nigeria: Detecting the threshold level†CBN Journal of Applied Statistics Vol.3(2)
Ekpenyong E.J. and Udoudo U.Y. (2016). Short-Term Forecasting of Nigeria Inflation Rates Using Seasonal ARIMA Model. Science Journal of Applied Mathematics and Statistics, 4(3),101-107
Fasanya O.I. and Adekoya O.B. (2017). Modelling Inflation Rate Volatility in Nigeria with Structural Breaks. CBN Journal of Applied Statistics 8(1),175-193
Godwin, B. K. and T. J. Grennes (1994) Real Interest Rate Equalization and the Integration of International Financial Markets, Journal of International Money and Finance 13, 107124.
Granger, C. W.J. and Joyeux, R. (1980) An introduction to long-memory time series models and fractional differencing. Journal of Time Series Analysis, 1, 15±39.
Granger, C.W.J (1980) Long Memory Relationships and the Aggregation of Dynamic Models. Journal of Econometrics, 14, 227-238
Haberler, G. (1960) “Inflation, its causes and cures†American Enterprise Association Washington D. C.
Haug, A. (2014) On Real Interest Rate Persistence: The Role of Breaks, Applied Economics 46, 1058-1066.
Ho, S. L and Xie, M. (1998) “The Use of ARIMA Models for Reliability Forecasting and Analysisâ€, Computers and Industrial Engineering - An International Journal, 35, (1- 2), 213-221
Hosking, J.R.M (1981) “Fractional Differencingâ€, Biometrica, 68, 165-176
Kwiatkowski, D., Phillips, P., Schmidt, P., and Shin, Y. (1992). Testing the Null Hypothesis of Stationary against the Alternative of a Unit Root. Journal of Econometrics, Vol. 54, pp. 159-178.
Lai, K.S. (1997) Long term persistence in real interest rate. Some evidence of a fractional unit root. International Journal of Finance and Economics 2, 225-235.
Lebow, D.E & Rudd, J.B (2006). Inflation Measurement. Finance and Economic Discussion Series Division of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington D.C
MacDonald, R., and P. Murphy (1989). ‘Testing for the Long-run Relationship between Nominal Interest Rates and Inflation Using Cointegration Techniques’. Applied Economics, 21, 439-447.
Mankiw, N.G (2010) Macroeconomics. 7th Ed. Worth Publishers, New York.
Mishkin, F. S. and Simon. J. (1995). “An Empirical Examination of the Fisher Effect in Australia.†Economic Record, 71(214): 217-29.
Neely C. J. and Rapach D. E. (2008). ‘Real Interest Rate Persistence: Evidence and Implications’. Federal Reserve Bank of St. Louis Review, 90(6), pp.609-41.
Nkoro, E., Uko, A. K. (2016), Exchange Rate and Inflation Volatility and Stock Prices Volatility: Evidence from Nigeria, 1986-2012, Journal of Applied Finance and Banking, 6(6), 57-70.
Okafor, C. and Shaibu, I. (2013). Application of ARIMA models to Nigerian inflation dynamics. Research Journal of Finance and Accounting, 4(3), 138-150.
Omotosho, B.S. and Dogowa, S.I. (2012). Understanding the Dynamics of Inflation Volatility in Nigeria: A GARCH Perspective. CBN Journal of Applied Statistics 3(2),51-74
Osarumwense O.I and Waziri E. I. (2013): Modelling Monthly Inflation Rate Volatility, using Generalised Autoregressive Conditionally Heteroscedastic (GARCH) Models. Evidence from Nigeria. Australian Journal of Basic and Applied Sciences, 7(7): 991-998
Osuala A.E., Osuala K.I. and Onyeike S.C. (2013). Impact of inflation on economic growth in
Nigeria –A causality test. JORIND 11(1),206-2016
Rapach, D. E., and C. E. Weber (2004). ‘Are Real Interest Rates Really Nonstationary? New Evidence from Tests with Good Size and Power’. Journal of Macroeconomics, 26, 409430.Rose, A.K. (1988) Is the real interest rate stable? Journal of Finance 43, 1095-1112.
Rose, A. K. (1988). “Is the Real Interest Rate Stable?†Journal of Finance, 43(5): 1095-112.
Sofiane, S and Ahmed Z. (2007). ‘On the Persistence of Real Interest Rates: New Evidence from Long-Horizon Data’. Quantitative and Qualitative Analysis in Social Sciences Volume 1, Issue 1, 2007, 63-77
Sokpo, J.T., Iorember, P.T. and Usar, T. (2017) “Inflation and stock market returns volatility: Evidence from the Nigerian stock market 1995Q1-2016Q4 an EGARCH Approach.
International Journal of Econometrics and Financial Management, 5( 2), 69-76
Taofic, M.I. and Omosola, M.A. (2013). The relationship between stock return and inflation in Nigeria. European Scientific Journal, 9(4), 146-157
Thornton, J. (2006). High and Variable Inflation: Further Evidence on the Friedman Hypothesis: Southern African Journal of Economics, 74:167-171
Tsay, W.J. (2000) The long memory story of the real interest rate. Economics Letters 67, 325330.
Wallace, M. S., and Warner J. T. (1993). The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration. Review of Economics and Statistics, 75, 320-324.
