INTERELATIONSHIP BETWEEN GRANGER CAUSALITY AND FORECAST ERROR VARIANCE DECOMPOSITION ON THE EFFECT OF GDP AND INFLATION RATE ON NIGERIA ECONOMY

AYODELE ABRAHAM AGBOLUAJE

Abstract


ABSTRACT

This paper is on interrelationship between Granger Causality and Forecast Error Variance Decomposition to show relationship between the variables on the effect of GDP and Inflation Rate on Nigeria economy. Investigations show that VAR (3) model is appropriate and VEC (2) model has one cointegration relation.  Results of the analyses show that Granger Causality test shows that the P-value 0-0495 for per capita GDP do not granger-cause inflation rate and nominal GDP is significant and can be rejected at the 5% level of significant by implication this means that a rise in per capita GDP is a signal of economic growth but the rise is very slow. In forecast error variances; innovations in per capita GDP contributed little to explain the variation of nominal GDP and inflation rate this means that the economic growth rate is very slow. Hence, in conclusion the Granger Causality test and Forecast Error Variance Decomposition on investigating the effect of economic growth rate yielded the same result.

KEYWORDS: VAR, VECM, Granger Causality, Forecast Error Variance Decomposition, , Per Capita GDP, Nominal GDP and Inflation Rate.

 


References


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