ABSTRACT
This research intend to model inflations rate of Nigeria using Autoregressive Integrated Moving Average (ARIMA) for monthly data on inflation rate from January 2003 to January 2021, and forecast for February 2021 to December 2021. The result indicates that ARIMA (2,0,1) is the best model for modelling Nigerian inflation rate, base on the forecast value the result indicates that the inflation rate will be decrease in to December 2021. And the inflation should put into on order to make the Inflation Rate in Nigeria to a simple digit, as recommended.
TABLE OF CONTENTS
Title Page
Approval Page - - - - - - - - - - - - - - - - -ii
Declaration - - - - - - - - - - - - - - - - -iii
Certification - - - - - - - - - - - - - - - - -iv
Dedication - - - - - - - - - - - - - - - - -v
Acknowledgement - - - - - - - - - - - - - - - -vi
Abstract - - - - - - - - - - - - - - - - - -vii
Table of Contents - - - - - - - - - - - - - - - -viii
CHAPTER ONE
1.0 Introduction - - - - - - - - - - - - - - - -1
1.1 Historical Background of the Study - - - - - - - - - - -2
1.2 Statement of the Problems - - - - - - - - - - - - -3
1.3 Aim and Objectives - - - - - - - - - - - - - -3
1.4 Scope and Limitation - - - - - - - - - - - - - -3
1.5 Definition of the Term - - - - - - - - - - - - - -3
CHAPTER TWO
Literature Review - - - - - - - - - - - - - - -5
CHAPTER THREE
METHODOLOGY
3.1 Introduction - - - - - - - - - - - - - - - -9
3.2 Method of Data Collection - - - - - - - - - - - - -9
3.4 Statistical tools - - - - - - - - - - - - - - -9
3.6 Autoregressive (AR) model - - - - - - - - - - - - -10
3.7 Moving Average (MA) Model - - - - - - - - - - - -11
3.8 Autoregressive Moving Average (ARMA) models - - - - - - - -12
3.9 Autoregressive Integrated Moving Average (ARIMA) models - - - - -12
3.10 Model identification - - - - - - - - - - - - - -13
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 Introduction - - - - - - - - - - - - - - - -15
4.1 Data Presentation - - - - - - - - - - - - - - -15
4.2 Time series plots - - - - - - - - - - - - - - -17
4.2Unit Roots test - - - - - - - - - - - - - - - -18
4.3 The estimation of ARIMA (2, 0, 1) - - - - - - - - - - -19
4.4 Diagnostic Checking - - - - - - - - - - - - - -20
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary - - - - - - - - - - - - - - - - -22
5.2 Conclusion - - - - - - - - - - - - - - - - -22
5.3 Recommendations - - - - - - - - - - - - - - -22
Reference - - - - - - - - - - - - - - - - -24
Appendix - - - - - - - - - - - - - - - - -27
CHAPTER ONE
1.0 Introduction
Inflation can be defined as the persistent and continuous rise in the general prices of commodities in an economy (Nyoni & Bonga, 2018a). In today’s world, the knowledge of what helps forecast inflation is important (Duncan & Martínez-García, 2018). Policy makers can get prior indication about possible future inflation through inflation forecasting (Nyoni, 2018k). It is possible to attribute the high rate of inflation in Nigeria to factors such as, low output growth rate, high prices of imported products, depreciation in the exchange rate and probably external factors like crude oil price. Since, price stability is one of the key objectives of monetary policy (Hadratet al, 2015), while another is to maintain a persistent economic growth along with low inflation (Islam, 2017), it is up to the policymakers to be forward – looking. Good forecasting ability is germane to achieve this objective (Hadratet al, 2015). Inflation forecasting is not only a useful guide for policy discussion, it also plays a dominant role in a situation where a country is practicing an inflation targeting regime as it can alert policymakers to take drastic decision when inflation deviates from its target (Iftikhar&Iftikhar-ul-amin, 2013; Hadratet al, 2015).
Again, because monetary policy is associated with lags which are significant, it is ideal for policy to be designed in a forward – looking manner, this further stresses the importance of obtaining accurate forecasts for inflation (Mandalinci, 2017; Nyoni, 2018k). These and many other reasons make inflation modeling and forecasting sacrosanct for the monetary authority.
The history of high inflation rate in Nigeria could be traced to the Udoji Commission of 1974 that proposed an enhanced salary structure for civil servants, the so-called “Udoji Award”without considering the aftermath, as well as, the unfortunate civil war of 1967 to 1970. Inflation has been one of the most persistent economic challenges in the world, especially in developing countries (Jere&Siyanga, 2016). Nigeria has been facing this challenge for so many years now. The monetary authorities in Nigeria are confronting two challenges- maintaining stable inflation and ensuring high growth in the economy. As a result of the political upheaval in the country, the inflation rate surged to 57.16% in 1993. It further increased to 72.83% in 1995. However, in 1997, it reduced by 64.33% to 8.5%. It remained on a single digit from 1997 to 2000. Having achieved a single digit inflation, the Nigerian government and the monetary authority couldn’t sustain the trend as inflation increased to 19% in 2002. Between 2003 and 2009, the inflation rate averaged 11.42%. The country recorded its lowest inflation rate (5.38%) in 2007. The inflation rate was 8.47%, 8.05%, 9.01% and 15.69% in 2013, 2014, 2015 and 2016 respectively (WDI, 2017). As of December 2017, the inflation rate had dropped to 15.37% (National Bureau of Statistics, 2017).
Recent developments in the world such as globalization, changes in policies (inflation targeting), among other factors have made forecasting of inflation to be difficult (Duncan &Martínez-García, 2018). Due to the importance of inflation forecasting in a modern economy, many researchers; for example, Aron&Muellbauer, 2012; Oguncet al, 2013; Chen et al, 2014; Balcilaret al, 2015; Pincheira&Medel 2015; Medelet al, 2016; Altug&Cakmakli 2016 as well as Mandalinci 2017 have extended their studies to cover two or more countries. The difficulty of controlling inflation and the time lag of monetary policy suggest the need to maintain stable inflation. Most studies that tried to forecast inflation in Nigeria either used ARIMA (Adebiyietal., 2010; Olajideet al, 2012; Uko&Nkoro 2012; Etuket al, 2012; Okafor&Shaibu 2013; Kelikume& Salami 2014; Mustapha &Kubalu 2016; Popoolaet al., 2017), SARIMA (Doguwa&Alade, 2013) or a combination of both (Otuet al., 2014; John & Patrick, 2016).
1.1 Historical Background of the Study
The history of inflation in Nigeria is full of up and down, for example; in the middle of 1970 when there was an oil boom in the economy the rate of inflation goes out of the way and the military government of that time did not help matters with it inflationary policies such as the Udoji awards that unnecessarily put money in the pockets of civil
The short span government of Buhari tried to bring the rate of inflation down after the excesses of civilian administration of Shagari, but the introduction of structural adjustment program (SAP) by Babangida, despite it much popularized potential benefits left the macroeconomic environment highly destabilizing Despite the apparent economic benefits of Despite the apparent economic benefits of return to democracy in 1999. the rate of inflation in much of this period has remained high. further undermining government efforts to entrench macroeconomic stability.
The debt reduction policies of Obasanjo from 1999-2007 have to some extent help to reduce the hike in the inflation rate, but his poor budgetary discipline did not help matters. Corruption and death of infrastructures throughout his period have seriously undermined efforts by some few of his cabinet members to restore macroeconomic stability.
1.2 Statement of the Problems
Inflation rate reduces real income-prices rise so the same amount of money cannot buy as much. People has less incentive to save as the opportunity cost of saving is rising continuously and less saving means less funds available for investment. For this reasons I intend to conduct this research to models the inflection rate for Nigeria in order to forecast future inflection rate.
1.3 Aim and Objectives
The aim of this research is to analyze the inflation rate in Nigeria for the period between 1981 - 2021.
The aim of this research can be achieved by the following objectives:-
1. To observe any underlying pattern for inflation rate.
2. To determine the maximum and minimum inflation rate.
3. To estimate model using (ARMA) models
4. To forecast or predict inflation rate from February 2021 to December 2021.
1.4 Scope and Limitation
This study covers a period of 41 years that is from 1st quarter 1980 to 1st quarter 2021 on Nigerian quarter inflation rate. The data will be collected from Central Bank of Nigeria website.
1.5 Definition of the Term
Modelling: Is about building representations of things in the 'real world' and allowing ideas to be investigated; it is central to all activities in the process for building or creating an artefact of some form or other. In effect, a model is a way of expressing a particular view of an identifiable system of some kind.
Inflation: Is the decline of purchasing power of a given currency over time. The rise in the general level of prices, often expressed aa percentage means that a unit of currency effectively buys less than it did in prior periods.
Inflation rate: Is the percentage increase or decrease in prices during a specified period, usually a month or a year. The percentage tells you how quickly prices rose during the period. For example, if the inflation rate for a gallon of gas is 2% per year, then gas prices will be 2% higher next year.
Rate: a measure, quantity, or frequency, typically one measured against another quantity or measure.
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