Inflationary pressure in Nigeria: the structuralists’ approach

Abstract

Opinions differ on the right solutions to inflation in Nigeria. This is due mainly to the fact that while a school of thought sees inflation as a fundamental monetary phenomenon, another school sees it as structural. This paper examined the structural aspect. Structural factors in Nigeria as principal causes of inflation were identified. These structural factors were grouped together under budget deficits, external reserves, and the level of the Nigerian economy (represented by the GDP). Using data on these variables for 32 years (1977 - 2008), and analyzing them with Co- integration and Error Correction Model (ECM), it was found that inflation is 77% affected by structural variables and that the Nigerian economy, as expected, is negatively correlated to inflation while budget deficits and external reserves are positively correlated. All the variables are significant at 5% significant level. The policy implication of the finding is that the supply management of curbing inflation cannot be ignored in tackling inflation in Nigeria.

Key words: Inflation Structural Fundamental Budget deficit External reserves GDP