The purpose of this study is to ascertain the determinant of inflation in Nigeria and Ghana respectively. Specifically the study will examine if there is long run relationship between inflation determinants and Inflation in Nigeria and Ghana. The study will also examine the extent inflation responds to its own shock and the shocks from exogenous factors within this country, recommendation will be made based on the findings of the research work.
Today inflation has become a household phenomenon in most African countries. According to Noko (2016) inflation is seen as a major threats to developing countries. Although, economics theories argues that its moderate is required for sustainable economic growth in any country. Economic literature revealed that moderate (2-5%) inflation rate is necessary in an economy because it encourages investment and production as well as economic growth through multiplier effect. On the other hand, high inflation rate that assume double digits to triple digits is inimical to sustainable economic growth. This is because double digit inflation has the ability to cause uncertainty in investment decision of private sector, reduce consumer’s purchasing power and reduce aggregate demand in general.
The determinant of inflation especially in developing countries has assume a controversial debates among economist. The debates is largely intensified due to the facts that inflation in developing countries especially West African countries has defiled any known economic theories mostly because of their structural rigidities (Umaru and Zubairu, 2012; Noko, 2016). In general, money supply is consensually believed to be the major cause of inflation in developed countries while structural factor like currency depreciation, institutional framework, balance of payment crisis, political crisis are often regarded as the determinant of inflation in developing countries like Nigeria and Ghana.
Although there was no general consensus among the literature reviewed on determinant of inflation in Nigeria and Ghana but majority of the empirical works reviewed proves that exchange rate, oil price, money supply, deficit financing, institutional framework and real income is the major determinant of inflation in Nigeria (Oyejide, 1972; Fatukasi, 2008; WAMI, 2012). While earlier studies on inflation in Nigeria attributed inflation to growth in broad money (Oyejide, 1972; Akinnifesi, 1984; Adeyeye and Fakiyesi, 1980 & Osakwe, 1983). Oyejide (1972) estimated the relationship between deficit financing and inflation in Nigeria modelling Fisher equation and concludes that growth in money supply impacts on inflation rate.
Recent studies on determinant of inflation in Nigeria attributed inflation to structural factor than monetary policies. In a study conducted by Kuijs (2002) on inflation determinants in Nigeria, it was discovered that foreign exchange rate, wages and foreign prices are the major determinant of inflation. Anfofum et al (2015) using VAR methodology concluded that exchange rate, agricultural output, imports of goods and services and deficit financing has longrun relationship with inflation in Nigeria. While studies like Chiaraah & Nkegbe (2014) argued that inflation is solely determined by money supply in Ghana other studies has rejected this assertion and have attributed inflation to electioneering, exchange rate depreciation, oil price among others. Patrick & Havi (2014) analyzed the determinant of inflation in Ghana and concluded that oil price, exchange rate depreciation, deficit financing are the leading determinant of inflation in Ghana.
The traditional monetarist schools argued that inflation is everywhere a monetary phenomenon. To them inflation is caused by excess of money supply over money demand and therefore prescribe the reduction in money supply through reduction in government deficit financing and reduction in credit made available to the public for investment purpose as panacea to inflation. Keynesians believed that inflation is caused by excess in aggregate demand over aggregate supply in the real sector. While the structuralist believes that inflation in most developing countries is caused by some rigidities in the economy like structural maladjustment and institutional feature in business sectors. Arguably, continuous depreciation of currency, institutional framework, oil price, deficit financing and balance of payment deficit are the major determinant of inflation in West African counties case study of Nigeria and Ghana. Thus, this paper aim to investigate the determinant of inflation in Nigeria and Ghana.
Following the study of Afofu, et al (2015) who employed VAR model to estimate determinant of inflation in Nigeria. This study employed VAR model to determine the determinant of inflation in Nigeria by looking at the long run relationship between inflation determinant and inflation as well as using Impulse response test to check how inflation responds to its own shock and exogenous shocks.
This research will be divided into six section, section I will focus on introduction to the subject matter, section II will discuss relevant theories which will serve as the basis of model formulation, section III will focus on methodology and model building as well as techniques of estimation, section IV will focus on descriptive analysis of the result of the different countries under investigation, section V deal with analysis of statistical test and lastly section VI will draw conclusion based on the empirical findings.
2.1 Review of theoretical Literature
Quit a number of theories has evolved to explain the determinant of inflation in both developed and developing countries. Some of these theories will be examined in this section.
2.1.1 Demand Pull Inflation
Demand pull inflation theory can be explained from the monetarist perspective and from the Keynesians perspective. The monetarist explain inflation from the monetary angle as such they assert that inflation is everywhere a monetary phenomenon. According to the monetarist inflation is caused basically by increase in money supply which often leads to rightward shift in aggregate demand curve, Irvin Fisher argued that a proportionate increase in money supply leads to an equiproportionate increase in the price level given a situation of full employment level. Milton Friedman (1981) argued that only money matters and as such that monetary policy is more potent than fiscal policy in economic stabilization. According to the monetarist, price and output can be controlled by the monetary authority. Therefore, the monetarist recommends reduction in money supply through raising the interest rate, reduction in credit to public sector among others as solution to inflation. Lucas (1996) has criticized the monetarist approach to controlling inflation to only applicable in the shortrun. He argued that monetary authority adoption of tight interest rate will worsen the situation of price level in the long run.
However, Keynesians refute monetarist explanation of inflation on the ground that there was no link between money supply and price level causing upward shift in aggregate demand. Keynes rather focused on the real sector in explaining the determinant of inflation. Keynes argued that inflation can only occur when the aggregate demand exceed aggregate supply at the full employment level. According to Keynes given the situation of full employment a rise in household consumption demand, rise in business sector investment demand, and increase in government expenditure and rise in net export individually or collectively will leads to an upward pressure on price thereby causing inflation in the country.
Keynes believed that so long the economy has not reached full employment state increase in aggregate demand will not necessarily cause inflation in the country. He therefore argued that any policy to control inflation will be focused on reduction of all or one of the component of aggregate demand. For instance, inflation caused by deficit financing can be controlled through reduction in government expenditure.
2.1.2 Cost-Push Inflation theory
Cost-push theory evolved around the 1970’s to explain the role of labour union in raising the average price level. Contrary to demand pull theory, cost-push entail rise in the general price level resulting from supplier mark-up. If the trade union at any time pushes for wage increase, because the producer would not want to bear the burden of wage increase they will push it to consumer by increasing the price of the product. Since the consumer money wages has been increased they can afford the increase in the product price. The increase in the price of goods will propel the workers to further press for more increase in wages to maintain their standard of living, in same manner producer will still respond in like manner thereby causing inflation in the country.
Another cause of cost-push inflation is the activities of few monopolistic and oligopolistic firms. Increase in cost of production (variable cost) can be transferred to final consumer by way of increase price by monopolistic or oligopolistic firm. Cost-push inflation can also be imported. This one is common to developing countries who constantly experience fall in the value of their currency making imported goods very costly. African generally are import dependent and because their currency are often eroded their imported product are very costly causing inflation.
Nigeria for instance, imports almost all her intermediate products and raw material used in production in the country, with the recent fall in crude oil price, the value of naira was eroded causing the price of imported goods to skyrocket causing serious inflation in the country. Ghana unlike Nigeria import crude oil to power her energy demand in the country as such their inflation goes up with rise in crude oil price in the international market (Oppong etal, 2015). This type of inflation is caused by rise in any of the factors of production. Noko(2016) asserts that monetary and fiscal policies may not be applicable in this situation to control the price level since inflation in this scenario is not caused by demand-pull inflation.
2.1.3 Structural Inflation theory
This theory emerged in Latin American in the 70’s to explain the determinant of inflation in developing countries. The structuralist condemn the use of monetary and fiscal policy in fighting inflation in developing countries, to them monetary policy as a measure to curb inflation is a prescription for stopping the economic growth of developing countries because their inflation is not caused by increase in money supply or aggregate demand. The theory argued that inflation in developing countries is caused by structural rigidities in the economy. Such structural rigidities includes currency depreciation, population growth, over dependency on imported goods, institutional framework, corruption, supply bottle neck, oil price, fall in export earnings, poor agriculture harvest among others.
Obasi (2007) argued that as demand for agricultural goods increases in the face of inelastic supply due to a defective system of land tenure and other rigidities such as irrigation, storage, finance, and marketing facilities etc., the prices of agricultural good rises causing inflation. Oppong et al (2015) asserts that electioneering which is pre and post-election activities often cause inflation in Ghana and this is peculiar to most Africa countries who spend a lot campaigning during election period. Inflation in Nigeria for instance has been moving with changes in international crude oil price, as crude oil price falls, inflation in Nigeria goes very high because a fall in oil price often result in fall in Nigeria exchange rate value. Gambia inflation rate is mostly determined by institutional framework and political climate.
In general structural theory of inflation advocates that inflation are often caused by different factors and more country specifics than generals therefore may not necessary require monetary policy to resolve it most of the time. This means that inflation is every a structural and institutional phenomenon in developing countries.
2.2 Empirical Review
The determinant of inflation in developing countries has been largely discussed especially in West Africa. This sub-section will examined the determinant of inflation in the three selected West African countries.
2.2.1 Determinant of Inflation in Nigeria
The determinant of inflation in Nigeria has been debated for decades. Although there was no general consensus among the literature reviewed but majority of the empirical works reviewed proves that exchange rate, oil price, money supply, deficit financing, institutional framework and real income is the major determinant of inflation in Nigeria (Oyejide, 1972; Fatukasi, 2008; WAMI, 2012). While earlier studies on inflation in Nigeria attributed inflation to growth in broad money (Oyejide, 1972; Akinnifesi, 1984; Adeyeye and Fakiyesi, 1980 & Osakwe, 1983). Oyejide (1972) estimated the relationship between deficit financing and inflation in Nigeria modelling Fisher equation and concludes that growth in money supply impacts on inflation rate.
Recent studies on determinant of inflation in Nigeria attributed inflation to structural factor than monetary policies. In a study conducted by Kuijs (2002) on inflation determinants in Nigeria, it was discovered that foreign exchange rate, wages and foreign prices are the major determinant of inflation. Anfofum et al (2015) using VAR methodology concluded that exchange rate, agricultural output, imports of goods and services and deficit financing has longrun relationship with inflation in Nigeria. In a similar study by Odusola and Akinlo (2001) it was discovered from the structural VAR test that exchange rate, output growth and oil price has influence on in inflation in Nigeria. Unlike Onwiodukit (2002) who concluded that crop shocks failure, oil price and exchange rate constitute the major determinant of inflation in Nigeria, Imimole and Enoma (2011) concluded that depreciation in exchange rate is the major cause of inflation in Nigeria.
2.2.2 Determination of Inflation in Ghana
There has been growing conflict among researchers on the determinant of inflation in Ghana. While studies like Chiaraah & Nkegbe (2014) argued that inflation is solely determined by money supply in Ghana other studies has rejected this assertion and have attributed inflation to electioneering, exchange rate depreciation, oil price among others. Patrick & Havi (2014) analyzed the determinant of inflation in Ghana and concluded that oil price, exchange rate depreciation, deficit financing are the leading determinant of inflation in Ghana. This was in collaboration to the earlier study of Appiah and Boahene (2003) which attributed inflation to such factors as military interventions, growth rate of real GDP, devaluation of the currency, and exchange rate differentials. Ocran (2007) concluded that inflation in Ghana is a function exchange rate, currency devaluation and money supply.
Most research on developed counties like US and Europe has attributed inflation to monetary phenomenon and wage push factors. They are argued that developed countries worry less about inflation because of the credibility of their monetary policy. Developed countries especially the OECD do not worry about inflation because of the credibility of monetary policy, and “get tough attitude towards inflation” (Ball & Mankiw, 2002; Jane & Jaime, 2003). Jane & Jaime (2003) noted that country like Unites States has enjoyed widespread decline in inflation and unemployment simultaneously. They noted three factors is responsible for the downward trends of inflation and unemployment in US to includes; acceleration in productivity, structural changes in unemployment that lower the natural rate of unemployment (NAIRU) in US and improved monetary policy credibility.
From the above analysis it is imperative to conclude that inflation and unemployment is not a problem to developed countries evidence from US but a serious macroeconomic problem to developing countries because of their import dependent nature. Also, inflation in West Africa is not everywhere a monetary phenomenon as postulated by the monetarist but everywhere a structural phenomenon.
3.1 Research Methodology
This paper employed quantitative methodology using econometrics technique of multiple regression analysis based on the classical linear regression model otherwise known as ordinary least square (OLS). Time series data obtained from World Bank database, and other financial institutions for the various countries concerned (Nigeria and Ghana).
3.2 Model Specification
The determinant of inflation has been largely debated by varying theories, while monetarist attributed inflation to monetary phenomenon following Fisher equation. The structuralist advocated that inflation in developing countries is unique to different countries and argued that inflation in developing countries is mostly determined by structural rigidities as discussed earlier. This postulation of the structuralist has been examined by some empirical works to check it efficacy in West African countries. For instance in Ghana, Oppong, et al (2015) modeled inflation rate as being dependent on exchange rate and crude oil price per barrel. In Nigeria, Anfofum et al (2015) using VAR methodology specified annual inflation rate against exchange rate, agricultural output, imports of goods and services and deficit financing to estimate the longrun relationship of inflation determinants in Nigeria. Abdoulie (2004) concluded that inflation in Gambia is determined by growth in broad money supply, budget deficit and exchange rate. The inflation determinant in this paper follow the argument of the structuralist with suggestion of the empirical work reviewed as presented below:
INF = f (PCI, EXR, OILP, MS) …………………………………………….. (3.1)
Statistically, the model is specified below:
INF = β0 + β1PCI+ β2EXR + β3OILP + β4MS + Ut……………… (2)
Where: INF = Inflation rate (Proxied by consumer price index), MS = Broad money supply, EXR= Exchange rate, OILP = Oil price per barrel, PCI = Per Capita Income, Ut = Stochastic error term, β1, β2, β3………. Β4 = slope of the regression equation.
3.3 Hypothesis of the Study
Having developed the model for this research work, the research will guided by the following hypothesis:
- There is no long-run relationship between inflation determinants and inflation rate in Nigeria and Ghana.
- Inflation in Nigeria and Ghana does not respond more to its own shock than shocks from other endogenous variables.
3.3 Estimation Techniques
Owing to the fact that this study made use of time series data, there is need that certain tests be carried out on the data to determine their nature and suitability for the intended purpose. The following economics tests were thus conducted:
Vector Auto-Regressive Mechanism (VAR)
A VAR model is an econometric techniques used to capture the linear interdependencies among multiple time series. A generalized VAR model employ the AR model by allowing more than one evolving variables. Each of the variables in the VAR model has an equation explaining its evolution using its own lag and the lag of other variables. VAR model is based the assumption of interdependence of among the variables under consideration.
For instance, considering two economic time series Y1t and Y2t representing inflation and its determinants. The VAR model with only one lag length can be represented in equation 3.1 below;
Y1t = β1Y1,t-1 + β2Y2,t-1 + et ……………………………………….3.1
To generalized equation 3.1 above to accommodate more endogenous variables at one lag length, the equation can be written as given equation 3.2 above.
Yt =∑AY1 t−1+…+∑ApYt p− +et ………………………………………………3.2
Yt and its lag values, and et are Px1 vectors of endogenous variables and A1 … Ap are K*K- matrices of constant to be estimated or vector of explanatory variables. The VAR result shall enable us to analyze the impulse response functions and forecast variance decompositions. The impulse response tells us how inflation variable respond to shocks to its own shock and shocks from other variables, while the variance decompositions show the magnitude of the variations in the inflation due to the policy variables.
Unit Root Test: The use of estimated trend relationship existing among economic variables is usually predicated upon the assumption the variables used to estimate the trend is stationary. This becomes needful so as to avoid the estimation of spurious regression. If the statistical properties above are constant over time, the series will be considered as being stationary otherwise, it will be considered as being non-stationary, a case of possessing unit root. A non-stationary data in this case will not be good for extrapolation basis owing to the fact that it such variables have long memory.
However, a non-stationary data can be rendered approximately stationary through a process known as differencing in which case if after first differing the variable in question becomes stationary, such a variable will be said to be integrated of order one, I(1). In the course of this analysis, Augmented Dickey-Fuller (ADF) unit root test was employed to determine the stationarity status of the variables considered. ADF relies on rejecting a null hypothesis of unit root (the series are non-stationary) in favor of the alternative hypothesis of stationarity by comparing the T-statistics usually referred to as Augmented Dickey-Fuller (ADF) tests statistics with the critical value at any chosen level of significance (1%, 5% or 10%).
Summary of six related empirical literature
Olatunji, Omotesho, Ayinde and Ayinde (2010) using co-integration approach to estimate the determinant of inflation in Nigeria. Specified annual inflation rate as dependent on annual total export, annual total import, annual agricultural output, annual government expenditure, annual exchange rate, and annual crude oil export. The study concluded that there was variation in inflation trends in Nigeria but found a long run relationship among the variables consider in the work. The author therefore recommended that policies should be made to reduce interest rate to the level that will encourage investment in the country while reducing importation to avoid imported inflation into the country.
In another study carried by Samuel and Rashid (2001) to ascertain inflation determinants in Tanzania using ECM, where Consumer price index was regressed disaggregate money supply components, GDP and exchange rate. It was discovered that monetary factors plays more role in inflation in the short-run while exchange rate plays significant role in consumer price index in the long-run. They argue that inflation can be controlled by adopting contractionary monetary and fiscal policy by government authority.
In Ghana, Oppong, et al (2015) modeled inflation rate as being dependent on exchange rate and crude oil price per barrel. They concluded that crude oil price in the international market, exchange rate and electioneering Spillover Quaternary Effects (ESQE) are key determinants of inflation in Ghana. They recommended that further studies should be carried in this area to discover other possible causes of inflation in Ghana.
Ibrahim, Odusanya and Akinwande (2010) analysis inflation and its determinant in Nigeria using co-integration and ECM techniques to estimate the relationship. The study concluded that money supply should be kept in check as well as government expenditure in order to control inflation in the country.
Enu and Havi (2014) investigated macroeconomic determinants of inflation in Ghana: A Co integration Approach. The estimated inflation against population size, foreign direct investment, foreign aid % of GDP, agricultural output and service sector output. They concluded that in the long run, population growth and service output affect inflation positively while foreign direct investment, foreign aid and agricultural output impact negatively. They recommended that government should made policy to increase supply size since inflation keeps increasing in the country.
In a similar study by Odusola and Akinlo (2001) it was discovered from the structural VAR test that exchange rate, output growth and oil price has influence on in inflation in Nigeria. They concluded that exchange rate can be controlled by increasing export of goods and service.
SECTION IV: ANALYSIS OF RESULT
This study investigate the determinant of inflation in Nigeria and Ghana within the sample period of 1980-2015. This period was chosen basically because of the inflation episodes in the above country after the first global oil price fall in early 80’s.
4.1 Data Description
Inflation rate (INF): Inflation can simply be defined as too much money chasing too few goods, or can be alternatively defined as the persistent increase in the general price level of a nation. Inflation is commonly measured using the Consumer Price Index (CPI) or gross domestic product deflator. This study made use of CPI which measures the changes in the price level of consumer goods over a specific period of time.
Per capita income (PCI): Gross domestic product can be defined as the total monetary value of all the goods and services produced in a country within a particular period of time, usually a year. GDP per capita otherwise called per capita income is gotten by dividing the GDP of any nation with her total population.
Broad Money supply (MS): Broad money supply (MS) is a broad measure of money supply and it includes currency in circulation, demand deposits, quasi money and foreign currency deposits. Currency in circulation is made up of coins and notes, while demand deposits or current account are those obligations which are not related with any interest payment and accepted by the public as a means of exchange drawn without notice by means of cheque.
Crude Oil Price (OILP): The oil price used is the global oil price of crude oil, it measure the spot price of various barrels of oil, most commonly either the West Texas Intermediate or the Brent Blend. The OPEC basket price was used as oil price.
Exchange Rate (EXR): Exchange rate is the price of one country’s currency expressed in another country’s currency. There are several types of exchange rates depending on the regulation: fixed, “floating” (depending on demand and supply), flexible exchange rate (hovering inside a certain corridor) and managed exchange rate. This study makes use of naira /dollar exchange rate for the period under consideration.
4.2 Descriptive Statistics
From table 1 in the appendix there seems to be evidence of significant variations as shown by the huge difference between the minimum and maximum values for the variables under consideration in the two countries. All the data exhibited positive skewness indicating an asymmetric or non-normal data distribution as the series relatively deviates from normality maintaining as evidenced by the variation in the minimum and maximum values of the variables. The kurtosis statistic equally shows exchange rate and oil price has platykurtic distribution in the two countries meaning they have higher influence than the other variables. The Jarque-Bera test is a test of normality. Based on our results using the P-values associated with the Jarque-Bera statistics, INF, MS and PCI are normally distributed while EXR, and POIL are not for the case of Nigeria but all the variables in Ghana are not normally distributed.
Figure 1 revealed that inflation rate has inverse relationship with oil price in Nigeria but has positive relationship with exchange rate. As oil price falls the exchange rate values depreciate raising the price of imports which often translate to inflation through cost-push mechanism as discussed earlier.
Figure 2 revealed the trend relationship between inflation, exchange rate and oil price. The trend revealed that unlike Nigeria which inflation rate increases with fall in the oil price. Ghana inflation rate is also affected by the exchange rate, following the depreciation of cedi in 1987 the inflation rate increased to 39.8%. This relationship was demonstrated again in 2008-2009 when the oil price in the international market soar high the exchange rate depreciated as well as the inflation rate.
ESTIMATION AND FINDINGS
5.1 Unit Root Test
The summary result of the unit root test conducted using the Augmented Dickey- Fuller (ADF) test for the two countries involved is contained in table 2. From the summary of the Augmented Dickey-Fuller (ADF) test presented in table 2, the result revealed that none of the variables were stationary at level in both countries investigated since their respective critical value at 5% is greater that the ADF statistics at level in absolute value. However, the variable were differenced at first difference and all the variables became stationary at same level. The implication is that the variables can be successfully used to estimate economic relationship.
Since all the variables were not stationary at level but were rather stationary at first difference co-integration test using Johansson co-integration test to check for long run relation among the variables. According to Perseran and Shin (1999) and Perseran et al (2001) the long run relationship of the economic variables are lost during the process of differencing the variables. They argue that if all the variables are stationary at same level then Johansson co-integration test can be used to estimate the long run relationship.
5.2 Co-integration Test
The Nigeria co-integration test using Johansson output is as presented in table 3. The table revealed the existence of longrun relationship in the data used for the regression purpose. This was revealed by the trace statistics which is significantly greater than the critical value in three cointrating vectors. On the other hand table four of the cointegration test revealed that there is also a co-integration among the variables used in Ghana as revealed by the trace statistics. The implication of the result is that in the longrun these variables so identified has influence on inflation rate in the long run. If these issues are not addressed immediately it will likely have negative impact on inflation trends on the economy.
5.3 Vector Auto-regression Result
The VAR test as shown in table five and six revealed that in Nigeria 46% of variation in inflation is explained by oil price, money supply, exchange rate, and per capita income while 57% of the variation in consumer price index is explained by oil price, money supply, exchange rate, and per capita income in Ghana. However, the VAR test further revealed that it is only inflation that has significant influence in explaining inflation in both countries. In both countries money supply and per capita income has negative relationship with consumer price index this was contrary with the apriori expectation for money supply. The impulse response function from the generalized equation further revealed that inflation shocks has more significant impacts on inflation rate volatility that any others in Nigeria. Although, inflation respond immediately to shocks in all the variables but responds more positively to past inflation rate and oil price. The test further revealed that inflation though it respond to money supply immediately but in the long run respond to same in negative way. This was in agreement with the result of the VAR test as analyzed earlier.
On the other hand, in Ghana inflation respond significantly to its own shock positively as well as shocks from money supply and exchange rate but not as high as it respond to its own shocks. Inflation respond to oil price negatively but maintain a stable response to per capita income over the period. The implication of the IRF is that inflation in both country responds more to its own shocks in the short run but decreases as the time lag passes away. It is also interesting to note that inflation respond to exchange rate, oil price and exchange rate positively but respond negatively to money supply and per capita income.
5.4 Variance Decomposition
The variance decomposition test like the IRF is used to check the degree of response of a variables to its own structural shocks and the shocks from other variable. Table 7 and 8 revealed the responses of inflation to its own shocks and the shocks of other variables. Table 7 below revealed that inflation in Nigeria responds to about 98.4% to its own shocks while as small as 1.6% of the shocks in inflation is explained by the other variables. From the result we discover that although inflation respond to oil price than the other variable in the short run but responds faster to shocks from exchange rate in the country. The response of inflation to its own shock reduced up to 86% in period ten indicating that in the long run inflation will respond more to exchange rate and oil price in the long run.
However, table 8 revealed the responses of Ghana inflationary trends to its own shocks and the shocks from other variables. The test further revealed that inflation responds to about 85% to its own shocks. In Ghana inflation responds more to per capita income in the short run than in the long run. Like the case of Nigeria inflation responses to its own shocks keep declining further and further as the period increases. In the 10th period inflation only responds to about 55% to its own shocks where 45% of the shocks came from the shocks of other variables. An interesting things to note in the variance decomposition test of Ghana is the behavior of money supply. At the short run money supply was not responsible to inflationary pressure but as the time lag increases the responses of inflation to money supply increase drastically.
Table 8 revealed that as at the 10th period money supply shocks account for about 29% of the shocks in the inflationary trends in Ghana.
To check for the presence of autocorrelation in the model used for this regression analysis the VAR LM serial correlation test were used to test for autocorrelation. The test revealed that at lag of one the model used was found not to have autocorrelation since the P-value corresponding to the test in lag one and two is significantly greater than 5% level of significance. The test is necessary to make the model fits for policy option and analysis.
5.5 Hypothesis testing
The first null hypothesis states that inflation does not have long run relationship with its identified determinants in Nigeria and Ghana. Judging from the analysis of the co-integration test using Johansson co-integration test, it is clear that there is sustainable longrun relationship between inflation and its determinants in Nigeria. This implies that inflation can be controlled both in the long run and short run by controlling the movement of those variables at large.
The second hypothesis states that Inflation in Nigeria and Ghana does not respond more to its own shock than shocks from other endogenous variables. This hypothesis is equally rejected like the first null hypothesis sine judging from the IRF and variance decomposition test, inflation was seen to respond more to its own shocks than the shocks from any other variables. This suffice to say that inflationary trends should be largely watched and that activities of the black market especially in the consumer products and foreign exchange market should be observed very closely and regulated.
The result of the findings collaborate the findings of previous studies especially that of Enu and Havi (2014), and Olatunji, Omotesho, Ayinde and Ayinde (2010) who argued that inflation has long run relationship with its determinants in the country they investigated. The variance decomposition test especially in Ghana collaborate with the study of Samuel and Rashid (2001) who argued that inflation is influenced more by monetary factors in the long run. The variance decomposition revealed that though money supply has minor shocks on inflation in Ghana in the short run but speedily increased in the long run.
SECTION VI: Conclusion
This paper investigated the determinants of inflation in two West African countries namely: Nigeria and Ghana. The findings is in consonance with both the theoretical and empirical work reviewed which ascribe inflation more to structural rigidities. The descriptive statistics revealed that the variables exhibited high fluctuation as revealed by the difference between minimum and maximum values and the non-normality of the variables among others giving rise to the test of stationarity.
The unit root test indicates that none of the variables were stationary at level in both countries investigated since their respective critical value at 5% is greater that the ADF statistics at level in absolute value. However, the variable were stationary after the differencing. The implication is that the variables can be successfully used to estimate economic relationship since it does not have unit root. The Johansson co-integration test revealed that all the variables exhibited co-integration relationship. This implies that there is long run relationship between consumer price index in both countries with at least three co-integrating vectors.
The result of IRF and variance decomposition test further revealed that consumer price index responds more to its own shock than the shocks from other variables in the equation. The LM serial correlation test revealed that there was absence of serial correlation in the model in both countries.
The implication of the study is that inflation in both Nigeria and Ghana responds more to its own shocks that other factors. Secondly, the non- monetary factors exert more influence on inflation trends in both countries than the monetary factors. This is in agreement with the findings of the earlier study reviewed which attributed inflation to structural factors than monetary factors. As was seen in the VAR test the money supply has inverse relationship with inflation in the countries.
Based on the above findings, it is imperative that the authorities of the countries reviewed should put in place all the necessary policies that will have bearing on the factors identified above in order to ensure that there is stability in the prices of goods and services with its attendant macroeconomic benefits. Also, policies aimed at resolving the supply side inefficiencies should be vigorously pursued to increase domestic production as well as export earnings. This will help the countries diversify their economy and less dependent on import thereby strengthening their exchange rate and maintain price stability.
Policy makers in Nigeria and Ghana should always try to identify to cause of inflation at each point in time before applying the right policy otherwise they will end up applying monetary policy in attempt to solve structural issues or macroeconomic factors responsible for inflation which will largely have no effect on the economy.
Lastly, the authorities should not fall prey to increase money supply in the short run in attempt to enhance real GDP growth but should focus on diversification by investing in energy to improve power supply, investing in infrastructure to improve business environment in order to attract more FDI, this is capable of increasing investment in the country. Instead of trying to use interest rate to control the growth of money supply in Nigeria and Ghana it much better for the country to identify the structural factors responsible for such growth and resolve same, this way the inflation rate will be curtailed. Once again inflation in West African is everywhere a structural phenomenon.
Let help you with your research work. Order Now
Abdoulie, J. T. 2004. Using Vector Autoregression to Analyse the Determinant(s) of Inflation in the Gambia. African Institute for Economic Development and Planning (IDEP) Available at http://unpan1.un.org/intradoc/groups/public/documents/idep/unpan018411.pdf
Adeyeye, E.A., Fakiyesi, T.O. 1980. Productivity price and incomes board and anti inflationary policy in Nigeria, in the Nigeria economy under the Military. Proceedings of the 1980 Annual Conference of Nigerian Economic Society. Ibadan
Akinnifesi, E.O. 1984. Inflation in Nigeria: Causes, Consequences and Control. The BULLION. 1(2)
Amos, O., Lucille, A. A., Doris, A., Augustine, D. O, Isaac, Q., Eric A. 2015. Key Determinants of Inflation in Ghana. British Journal of Economics, Management & Trade 8(3): 200-214.
Anfofum, A. A., Afang, H. A., Moses, G. D. 2015. Analysis of the Main Determinants of Inflation in Nigeria. Research Journal of Finance and Accounting 6(2): 144-156
Appiah, K. and Boahene (2003). Determinant of Inflation in Ghana – An Econometric Analysis.. IMF Working Paper WP/97/145.
Ball, L., Mankiw, G. 2002. The NAIRU in theory and practice. Journal of economics perspective, 16, 115-136.
Chiaraah A., Nkegbe, P.K. 2014. GDP growth, money growth, exchange rate and inflation in Ghana. J. Contemp. Issues Bus. Res. 3(2):75–87.
Engle, R.F. and Granger, C.W.J. 1987. Cointegration and error correction representation, estimation and testing. Econometrica 55(2): 251- 276.
Fatukasi, B. 2008. Determinants of Inflation in Nigeria: An Empirical Analysis. International Journal of Humanities and Social Science 1(8).
Granger, C.W.J. 1969. Investigating the causal relations by econometric models and cross- spectral methods. Econometrica 37(3): 424 – 38
Imimole, B. and Enoma, A. 2011. Exchange rate depreciation and inflation in Nigeria (1986 – 2008). Business and Economics Journal BEJ(28): 1-12.
Jane, I., Jaime, M. 2003. AN Empirical Analysis of Inflation in OECD Countries. International Finance Discussion Papers, 765
Kuijs, L. 2002. Monetary polict transmission mechanisms and inflation in Slovak republic. IMF working paper, No. 02/80. Washington, DC: IMF, www.imf.org/external /ft/wp/2002/wp0280.pdf
Noko, J. E (2016) Impact of inflation on Nigeria’s economic growth. [Assessed on 1st of April, 2017].
Obasi O.U. (2007) “Relative Price Variability and Inflation: Evidence from Agricultural Sector in Nigeria” AERC Research Paper 171 African
Ocran, M K (2007). A Modeling of Ghana’s Inflation Experience: 1960–2003. Ghana Institute of Management and Public Administration Accra, Ghana.
Odusanya, I. A. and A. A., Atanda (2010): Analysis of Inflation and Its Determinants in Nigeria. Pakistan Journal of Social Sciences, Volume 7, No. 2. Pg. 97-100.
Odusola AF, Akinlo AE. 2001. Output, inflation, and exchange rate in developing countries: An application to Nigeria. J. Dev. Econ. 39(2):199–222.
Olatunji, G.B., Omotesho, O.A., Ayinde, O.E. and Ayinde, K. 2010. Determinants of inflation in Nigeria: A cointegration approach. Contributed paper presented at the Joint 3rd African Association of Agricultural Economists (AAAE) and 48th Agricultural Economists Association of South Africa (AEASA) Conference, Cape Town, South Africa
Onwioduokit E.A. 2002. Fiscal Deficit and Inflation in Nigeria: An Empirical. Investigation of Casual Relationships. CBN Economic and Financial Review, (37)2: 1-1
Osakwe, J.O. 1983. Government Expenditures, Money supply and Prices, 1970-1980. CBN Economic and Financial Review 21(2).
Oyejide, T. A. 1972. Deficit Financing, Inflation and capital Formation: The Analysis of the Nigerian Economy, 1957-1970 .14
Patrick E. Havi, E. K. D. 2014. Macroeconomic Determinants of Inflation In Ghana: A Co integration Approach. International Journal of Academic Research in Business and Social Sciences 4(7).
Pesaran, M. H. and Y. Shin, 1999. An autoregressive distributed lag modelling approach to cointegration analysis. Chapter 11 in S. Strom (ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium. Cambridge University Press, Cambridge.
Pesaran, M. H., Shin, Y. and Smith, R. J., 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289–326.
Song Han and Casey B. Mulligan 2008. Inflation and the Size of Government. Federal Reserve Bank of St. Louis. Review, May/June 2008, 90(3, Part 2), pp. 245-67.
West African Monetary Institute (WAMI). 2012. EXCHANGE Rate, Inflation and Macroeconomic Performance in the West African Monetary Zone (WAMZ). WAMI OCCASIONAL PAPER SERIES NO 2.