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Revisiting the accuracy of inflation forecasts in Nigeria: The oil price–exchange rate–asymmetry perspectives

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  • Kazeem O. Isah
  • Abdulkader C. Mahomedy
  • Elias A. Udeaja
  • Ojo J. Adelakun
  • Yusuf Yakubu
  • Danmecca Musa

Abstract

Motivated by the distinctive paradoxical nature of the Nigerian economy as the only OPEC oil‐exporting economy that yet depends heavily on the importation of gasoline, we are compelled to re‐examine the accuracy of the oil‐based augmented Philips curve model in the predictability of inflation. Using quarterly data from 1970 to 2020, we investigate whether extending the oil price‐based augmented Phillips curve to include exchange rate improves the accuracy of inflation forecast in Nigeria. We rely on the outcomes of our preliminary analysis to account for the presence of endogeneity, persistence and conditional heteroscedasticity in the predictability of inflation following the Westerlund and Narayan (2015) procedure. We find the extended variant of the oil price‐based Phillips curve model that includes the exchange rate pass‐through as most accurate for improving inflation forecasts in Nigeria. Given the robustness of our results from several models, we conclude that the exchange rate channel through which shocks to the oil price transmit into the economy is essential for enhancing the accuracy of inflation forecasts.

Suggested Citation

  • Kazeem O. Isah & Abdulkader C. Mahomedy & Elias A. Udeaja & Ojo J. Adelakun & Yusuf Yakubu & Danmecca Musa, 2022. "Revisiting the accuracy of inflation forecasts in Nigeria: The oil price–exchange rate–asymmetry perspectives," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 329-348, September.
    • Handle: RePEc:bla:sajeco:v:90:y:2022:i:3:p:329-348
    DOI: 10.1111/saje.12313
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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