SIMULATION STUDY OF ERROR CORRECTION MODEL AND AUTOREGRESSIVE DISTRIBUTED LAG MODEL FOR SKEWED DISTRIBUTIONS.

This study performed simulation study of the Error Correction Model (ECM) and Autoregressive Distributed Lag (ARDL) Model on non-normally distributed data with the aim of comparing the performances. The study utilized both simulated data and the real life data on inflation rate and unemployment rate in Nigeria from a period of 1981 to 2016. Data was simulated from the uniform and exponential distribution. The Augmented-Dickey Fuller (ADF) test the real life data revealed that inflation and unemployment are stationary at first difference while cointegration test and bound testing revealed an existence of long run relationship between the macroeconomic variables. The study revealed that the ARDL model outperforms the ECM model for both the real life data and simulated data and that there is evidence of both short and long run relationship between inflation rate and unemployment rate in Nigeria. It also revealed that there is causality relationship between inflation rate and unemployment rate. The study therefore recommended that the Central Bank of Nigeria should pursue monetary policy that is consistent with the maintenance of a realistic and stable inflation rate in order to reduce the unemployment rate in Nigeria and the government should formulates adequate economic policies to stimulates and sustain the economic growth.