Linear and non-linear modelling of Nigerian Inflation Rate

International Journal of Research and Innovation in Applied Science (IJRIAS) | Volume VI, Issue VI, June 2021|ISSN 2454-6194

Linear and non-linear modelling of Nigerian Inflation Rate

Wiri, Leneenadogo¹, Chims Benjamin. E² & Richard Igbudu. C³
Rivers State Ministry of Education, Port Harcourt Nigeria.

Abstract
In order to model Nigeria’s inflation rate, this analysis compared univariate linear models to univariate nonlinear models. The data for this analysis was gathered from the Central Bank of Nigeria statistical bulletin on a monthly basis from January 2006 to December 2019. The upward and downward movement in the series revealed by the time plot suggest that the series exhibit a regime-switching pattern: the cycle of expansion and contraction. At lag one, the Augmented Dickey-Fuller test was used to screen for stationary. For univariate linear ARIMA (p d q)) and univariate non-linear MS-AR, seven models were estimated for the linear model and two for the non-linear model. The best model was chosen based on the criterion of least information criterion, AIC (2.006612), SC (2.156581), and the maximum log-likelihood of (-150.5480) for the inflation rate were used to pick MS-AR (1) for the series. In analysing inflation rate data, the MS-AR model proposed by Hamilton outperforms the linear autoregressive models proposed by Box Jenkins. The model was used to predict the series’ values over a one-year cycle (12 months).

Key word: inflation rate, linear models ,non-linear models and forecasting

1.0Introduction

Inflation has been an issue facing many countries around the world, especially undeveloped ones. It began as a result of the grouping of economic policies in the early 1960s as a measure to reduce the impact of inflation in societies. Most of these steps taken by developed countries to monitor the inflation issue are credit control instruments of the Central Bank. This is aimed at reducing and maintaining the amount of money in circulation to ensure low living costs. The problem of inflation is also faced by Nigeria as a developing nation. [13]. In Nigeria, inflation has been a concern for policymakers since the 1990s, and the rate of inflation has been strong since then. Inflation is neither new to the economy of Nigeria, nor to the world at large. Evidence has shown that inflation, with variations in severity or rates, exists in both advanced and unindustrialized countries. Inflation rates are higher in developing countries than those in developed countries. Inflation can be described as the process of the continuous increase in the price of goods and services as a result of a large amount of money in circulation used in exchange of few goods and services.

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