Phillips Curve Representation on Inflation in Nigeria: Evidence from Vector Error Correction Model.

The Phillips curve represents the relationship between the rate of inflation and the unemployment rate. This paper investigated the interrelationship between inflation rate and unemployment rate in Nigeria from 1970 to 2014. Annual data for these variables were collected from secondary sources. The ADF test revealed that inflation and unemployment rates are stationary at first difference while the Johansen cointegration test indicated one (1) cointegrating equation at 5% level of significance. The VECM model at lag 2 was used to investigate the short and long run interrelationship between inflation and unemployment rates in Nigeria. The result revealed a positive long run relationship between inflation and unemployment rate in Nigeria which negates the Phillip curve while the equilibrium error correction coefficient (ECM) estimate of -0.795 is highly significant with the correct sign. This implies a high speed of adjustment to equilibrium after shock. The Granger causality test revealed that inflation is not influenced by unemployment in the short run. This paper therefore recommends that the government should formulate economic policy to reduce inflation rate and unemployment in the long run.