DOES MONEY TELL US ANYTHING ABOUT INFLATION IN NIGERIA?
MICHAEL ADEBAYO ADEBIYI
This paper seeks to establish whether or not monetary aggregates M1 and M2 have useful information for forecasting inflation, other than that provided by inflation itself. The study is approached in two ways. First, it conducts forecasting experiments, using mean absolute percentage errors (MAPEs). It then evaluates whether each monetary variable improves the forecasts of a simple autoregressive (AR) (1) model of inflation or not. The study reveals that the MAPEs for all the variables are less than that of the benchmark AR (1) model. This implies that all the variables examined serve as important information variables for price movements.Also, from the inflation equation, the paper reveals that monetary aggregate (M2), Treasury bill rate, deposit rate and exchange rates are significant in the equation, therefore concluding that these variables provide useful information in predicting inflation in Nigeria.
Inflation, monetary aggregates, forecasting, error correction model
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