Project Abstract

Rapid output growth and low inflation are the most common objectives of macroeconomic policy in both developed and developing economies. The relationship between inflation, inflation uncertainty and output growth has attracted much interest in economic literature. The views on the direction of this relationship are divergent and empirical evidences vary, depending on the economy examined. The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy. Although Nigeria has adopted various monetary policy routes in order to achieve desired objectives of rapid output growth and low inflation levels, it has still struggled with inflation, uncertainty and output growth. This study therefore examined the interrelationship between inflation, inflation uncertainty and output growth in Nigeria for the period of 1961 to 2013. The study employed EGARCH-M (1, 1) modelling and pairwise Granger Causality test to examine the relationship among inflation, inflation uncertainty and output growth. Estimated results of the study revealed that inflation uncertainty and inflation both have positive and significant impact on themselves. This shows support for both the Friedman-Ball and Cukierman-Meltzer Hypotheses at the same time. Also, output growth positively and significantly affects inflation. Furthermore, causal tests showed overwhelming support for the Friedman-Ball Hypothesis that inflation causes inflation uncertainty in both short and long run. The study recommended that the Central Bank of Nigeria should employ proper inflation targeting in its monetary policy. Also since leverage and asymmetric effects were established, the study recommended that the benefits of keeping inflation low, the major contributory factors and drivers of current inflation must at all times be explained to the general public in order to help rationalize their inflation expectations.

Keywords Inflation, Inflation uncertainty, Output growth, EGARCH

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