Assessing Linear Interdependence between Inflation and Unemployment Rate in Nigeria

Abstract

This study examines the effect of inflation rate and unemployment rate in Nigeria for the period 1965-2017. Secondary was collected from the National Bureau of Statistics for the above period. The results from the Augmented Dickey Fuller (ADF) test showed all series are non-stationary at certain level but became stationary after first difference. The analysis using Multiple Regressions show that unemployment had a significant effect on inflation and vice-versa. The principal component analysis showed that only one factor explains 64.98% of the total variation; variables loaded shows that both factor and inflation increase while unemployment decreases and vice-versa. Result from Vector Autoregression also shows inflation and unemployment are affected by past values with the serial autocorrelation test showing the residuals are not correlated. While Granger Casualty shows there is no directional casualty between inflation and unemployment. However, a forecast of ten years was made using VAR (2) Model, based on the forecast Nigeria will not experience any significant increment or decrement in inflation and unemployment within the years of forecast. We therefore recommend a step up on Employment in order to reduce the rate of Inflation.