Academic journal article Economics, Management and Financial Markets

Testing the Philips Curve Hypothesis for Nigeria: Are There Likely Implications for Economic Growth?

Academic journal article Economics, Management and Financial Markets

Testing the Philips Curve Hypothesis for Nigeria: Are There Likely Implications for Economic Growth?

Article excerpt

ABSTRACT.

This paper tests for the validity of the Philips curve hypothesis in Nigeria. It employed generalized error correction model and time series data on Inflation, unemployment and gross domestic product from 1970-2010. The paper differs from others because of its methodology. While other variants of error correction model would require the variables to be unit root free, the GECM is good for series with or without unit root. The result showed that the short run inverse relationship hypothesized between inflation and unemployment by the Philips curve exists but is not significant, while inflation and unemployment were found to move in the same direction in the long run. For the relationship between inflation and unemployment on growth, the result showed that inflation accompanies growth while unemployment has a negative relationship with growth. Thus, contrary to the expectation that achieving low inflation was likely to increase unemployment, it is rather possible to achieve low inflation and stimulate employment creation in Nigeria. However, policy measures aimed at reducing unemployment is important as employment creation cannot be left as a consequence of achieving price stability and growth alone.

JEL Codes: E24, E31, O47, C22

Keywords: unemployment, inflation, growth, Generalized Error Correction Model

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Macroeconomic response to monetary policy remains critical to the debate on the Philips curve hypothesis and its backward and forward looking variants. Roeger and Herz (2012) pointed out the difference between the backward and forward-looking Phillips curve concerning and the macroeconomic effects of monetary policy shocks. On the backward looking Phillips curve, they noted that it predicts that a positive short-run response of the economic or output is followed by a period in which output is below baseline and that, the cumulative output effect would be zero. On the other hand, the forwardlooking variant would imply that there is a positive cumulative output effect from monetary policy shock. Though empirical evidence from Roeger and Herz (2012) showed that the output effects of money are consistent with the forward-looking variant, studies such as Rudd and Whelan (2006) had questioned the relevance of the forward looking term in the hybrid specification hence, debunking backward looking view. In Roeger and Herz (2012) however, it was noted that the macroeconomic response to monetary policy changes remains a vital aspect to be examined.

The need to reduce unemployment and achieve low/single digit inflation rate, have remained the focus of various governments in Nigeria since the return to democracy in 1999. This need has also been expressed through various economic reforms and blue prints such as the National Economic Empowerment and Development Strategy (NEEDs I and II), Nigeria's Transformation Agenda and national vision 20:2020 blue print (NPC, 2004, and NPC, 2007). Curtailing the response to monetary adjustment has also been the basis upon which several monetary policy committee decisions have been based in altering the nation's monetary policy rate in recent times. The aim of this paper therefore, is to validate the Phillips Curve Hypothesis in Nigeria and to examine the implication for Nigeria's economic growth.

The paper is divided into five sections. Section one discussed the problem statement and objectives of the paper. Section two, reviews empirical literature and theoretical literature related to the study, while section three discusses the research methodology. In section four, the results from the analysis of data is discussed, and lastly, the summary of findings as well as their implication for policy is presented in section five.

2. Literature Review

Empirical studies on the Philips curve hypothesis vary in their conclusions. Some researchers found the significant trade-off relationship between unemployment rate and inflation rates, others do not. …

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