A STRUCTURAL VECTOR ERROR CORRECTION (VEC) APPROACH TO ANALYZING THE DYNAMICS OF INFLATION IN NIGERIA

Abstract

This study employed a structural vector error correction (SVEC) framework to investigate the 
dynamic interactions among inflation, money supply, and real GDP. The variables are all 
integrated of order one and cointegrated. The shocks were identified by decomposing them into 
permanent and transitory in tandem with the underlying economic theory. In the short-run, the 
results revealed that shocks to inflation (permanent shocks) were predominantly driven by 
innovations in money supply and output. To identify the long run shocks, investment was 
constrained to have zero effects on the other variables; this way, investment shocks were found 
to be purely transitory which implies that fluctuations in investment primarily generate short
run deviations from equilibrium without altering the long-run path of inflation, money supply, 
or output. These results point to the need for maintaining credible and consistent monetary 
policy measures, and fostering sustainable output growth which could help in achieving long
term price stability.