A test for the contributions of urban and rural inflation to inflation persistence in Nigeria

ABSTRACT

This study tests the contributions of urban and rural inflation to inflation persistence in Nigeria using the fractional cointegration VAR model and the univariate fractional integration approaches. The results indicate a high contribution of urban and rural inflation to the overall inflation persistence in Nigeria albeit with contrasting evidence for the pre-and post-Global Financial Crisis (GFC) periods. While the urban inflation contributed more than the rural inflation to the persistence of the overall inflation during the pre-GFC, the converse holds during the post-GFC. Although, the empirical analysis of the factors underlying this outcome is reserved for future research, bridging the gap between the two inflation subsamples would be a plausible policy action.

KEYWORDS:

• Fractional cointegration VAR
• GARCH-model
• rural and urban inflation persistence
• global financial crisis
• Nigeria

JEL classification:

• C51
• C58
• E31
• G15
• N97

Acknowledgments

The authors gratefully acknowledge the insightful comments and suggestions of the peer-reviewers towards improving the quality of this manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. A closely related study by Tule, Salisu, and Ebuh (2020) ignores the possible heterogeneous behaviour of rural and urban inflation in Nigeria.

2. For an overview, see Marques (2004) and Martins and Rodrigues (2014) for a detailed survey of the literature.

3. To treat any intrinsic heteroscedasticity and serial correlation in the residuals, the Newey and West (1987) estimator is used to adjust the standard errors.

4. Discounting theoretical studies, the use of the FCVAR in applied literature is still rare, five studies (topic areas) that published using this methodology involve (i) commodity returns (see Dolatabadi et al. 2018) (ii) economic voting and political support (see Nielsen and Shibaev 2018) (iii) exchange rates (see Gil-Alana and Carcel 2018) (iv) Islamic Stocks (See Salisu et al. 2020) and (v) precious metals & Oil (See Usman and Akadiri 2021).

5. The Nielsen and Popiel (2018) MATLAB codes were used to evaluate the CVAR and FCVAR models in the study.

6. Appendix A report the results of the Unit root test.

7. Core inflation is defined in Nigeria as the inflation excluding the food component from the CPI basket.

8. We also performed unit root tests using the ADF and checked for the optimal lag length using the Schwartz information criterion (SIC) and Akaike information criterion (AIC). The results are not presented here to conserve space for other important considerations, however, the are available upon request.

9. This method has also been utilized in the literature to assess the statistical behaviour of economic and financial series (see for example, Salisu and Adeleke 2016; Salisu et al. 2016).

Additional information

Notes on contributors

Godday Uwawunkonye Ebuh

Godday Uwawunkonye Ebuh is an Assistant Director in the Monetary Policy Department, Central Bank of Nigeria. He holds a PhD in Statistics. His key research interests are econometrics and statistical modelling.

Afees Salisu

Afees Salisu is the Director of the Centre for Econometric and Allied Research (CEAR), University of Ibadan. He is also affiliated with the Global Humanistic University (GHU) as a University Professor & Doctoral Advisor. He holds a PhD in Economics. His key research interests are econometric modelling with special interests in energy and finance.

Victor Oboh

Victor Oboh is a Deputy Director in the Monetary Policy Department, Central Bank of Nigeria. He holds a PhD in Economics. His key research interests cover Development Economics.

Nuruddeen Usman

Nuruddeen Usman is an Economist in the Monetary Policy Department, Central Bank of Nigeria. His research interest includes open economy macroeconomics, financial econometrics and time series forecasting.