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You are what you eat: The role of oil price in Nigeria inflation forecast

Author

Listed:
  • Moses Tule

    (Monetary Policy Department, Central Bank of Nigeria Abuja)

  • Afees A. Salisu

    (Centre for Econometric and Allied Research, University of Ibadan)

  • Charles Chimeke

    (Monetary Policy Department, Central Bank of Nigeria Abuja)

Abstract
In this study, we propose a supply-side augmented Phillips curve for the Nigerian economy, which significantly enhances its inflation forecasts. We argue for the role of oil price as a good proxy for the supply side of inflation given the structure of the Nigerian economy, which essentially relies on oil revenue. Thus, we compare the forecast results of the oil-based augmented Phillips curve with the traditional variant, as well as time series models such as ARIMA and ARFIMA. We also test for any probable asymmetric response of Nigeria inflation forecast to oil price changes. The forecast analyses are conducted for both in-sample and out-of-sample periods using alternative forecast measures. We also consider alternative estimators such as Lewellen (2004) [LW hereafter] and Westerlund and Narayan (2012, 2015) [WN hereafter] estimators which account for relevant statistical properties of the predictors and their results are compared with the standard OLS estimator. The results suggest that the choice of estimator does matter for accurate inflation forecast for Nigeria, whether for in-sample or out-of-sample forecast and the WN estimator is preferred particularly when compared with OLS estimator. Secondly, the augmented model outperforms its traditional version, as well as time series models for both forecast samples. However, oil price asymmetries become evident when large samples are used. Our results are robust to alternative oil price proxies and forecast measures.

Suggested Citation

  • Moses Tule & Afees A. Salisu & Charles Chimeke, 2018. "You are what you eat: The role of oil price in Nigeria inflation forecast," Working Papers 040, Centre for Econometric and Allied Research, University of Ibadan.
    • Handle: RePEc:cui:wpaper:0040
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    References listed on IDEAS

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    Cited by:

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    2. Azeez, Rasheed Oluwaseyi, 2018. "Oil price volatility spillover effects on food prices in Nigeria," MPRA Paper 93188, University Library of Munich, Germany.
    3. Tule, Moses K. & Salisu, Afees A. & Chiemeke, Charles C., 2019. "Can agricultural commodity prices predict Nigeria's inflation?," Journal of Commodity Markets, Elsevier, vol. 16(C).

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    More about this item

    Keywords

    OECD; Nigeria; Phillips curve; Oil price; Inflation forecasts; Forecast evaluation;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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

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