Modelling the Determinants of Price Level in the Nigerian Economy

Abstract

This paper evaluated the deterministic ability of some macroeconomic variables on the Nigeria’s price level (PL) using the Vector Error Correction Model (VECM). Review of relevant literature was thoroughly carried out. The specification of the price deterministic model was consistent with the traditional backward-looking Philips curve, quantity theory of money and the Fiscal theory of the price level. The Johansen cointegration test results provided evidence of a long run relationship among the chosen variables. The VECM results showed that the 2nd lag of PL negatively and significantly affects current PL. The second lag of Real Gross Domestic Product (RGDP) had a positive and significant effect on the current PL. Current exchange rate made a negative and significant impact on the PL whereas exchange rate at lag two made positive and significant impact. Domestic credit positively and significantly affected PL in the first period and positively but insignificantly affected it in the second period. Trade openness had significant and positive impact on PL. Money supply, government expenditure and nominal interest rate had no significant impact on PL. The outcome of all the diagnostic tests supported the acceptability of the model’s results. Based on our empirical findings, we recommend that the Nigerian monetary authority should keep tab on the variables implicated by the model of this study as significant determinants of PL.