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IMPACT OF TRADE OPENNESS ON INFLATION AND UNEMPLOYMENT IN NIGERIA: 1986-2015
Abstract:
The short run relationship between inflation and unemployment was supported by the Phillips curve, the Rogoff’s hypothesis, howerver in 1983 shows that given the degree of openness the correlation between inflation and unemployment can change. Also, monetary policy credibility model pioneered by Kydland and Prescott in 1977 and its later extensions with open-economy considerations identify the link between inflation and openness to be positive or negative depending on the slope of the aggregate supply curve as well as whether monetary policy is conducted by rule or discretion. Given these positions, this study uses the Break Least Squares Regression (BLSR), correlation, sacrifice ratio, granger causality and the Vector Autoregression (VAR) to empirically examine the above theoretical relationships in Nigeria between 1986 and 2015. The result identifies that there is a trade-off between inflation and unemployment within the various openness regimes with significant negative correlations within them and accross the entire research period. Hence, this supports the existance of a Phillips curve in the short run, which also presents the CBN with strong policy menu in line with the Keynesians model of aggregate demand-driven business cycle. This finding lends support to the dual mandate of the CBN of targetting both output and inflation via its monetary policy. Also, the result identifies causation from openness to both inflation and unemployment. Then, accumulated responses of inflation and unemployment to openness from the IRFs (impulse response functions) results were positive and negative respectively. Finally, the study recommends that authorities in Nigeria need to tread carefully in their reform efforts aiming to increase trade openness because it could exacerbate inflation and as well help reduce unemployment.
IMPACT OF TRADE OPENNESS ON INFLATION AND UNEMPLOYMENT IN NIGERIA: 1986-2015
