CHAPTER THREE

METHODOLOGY
3.1: Introduction

This section of the study focuses on investigating the impact of inflation on the standard of
living in Nigeria. It outlines and discusses the econometric methodology to be employed, the
types of data to be utilized, the model specification, the data analysis techniques, and a
description of the variables to be incorporated into the models.

3.2: Data and it’s Sources

To investigate the impact of inflation on the standard of living in Nigeria, this study will
utilize secondary data, specifically pure annual time series data covering a 30-year period
(1990 – 2020). The data will encompass key variables such as the Inflation Rate (Consumer
Price Index - CPI), Human Development Index (HDI), Gross Domestic Product per capita
(GDP per capita), and the Unemployment Rate. Sources for this data will primarily include
the Central Bank of Nigeria (CBN), the World Health Organization (WHO), the National
Bureau of Statistics (NBS), and World Bank data indicators.
It's worth noting that one potential limitation of this study could be the challenges
associated with Nigeria's data collection system, which may pose difficulties for researchers
in conducting comprehensive and rigorous research.
3.3: Model Specification.
In order to answer the research questions and objectives, this study adapt the model of Ogbebor
et al (2020) with modification in terms of the variable used in the model. Their model was
specified based on the topic impact of inflation on standard of living in Nigeria presented in a
functional form as follows:

In mathematical form, the model turned to.

In econometric form with introduction of regression parameters, the model becomes;
Where;
HDI; = Human development Index (dependent variable).
IR = Inflation rate (independent variable).
GDPPC= Gross domestic product per capita (independent variable).
UEM= Unemployment rate (independent variable).
The a priori expectation of all the variables are; human development Index (HDI) a proxy for
household standard of living, Money Supply (MS), and Interest Rate (INT) should have positive
relationship with the level of inflation (i.e. , while RGDP should have a negative relationship
with the level of inflation e ).
3.4: Measurement of Variables
Human development index is the dependent variable and is a composite index that measures the
average achievements in 3 key dimensions of human development; life expectancy at birth which
measures the average number of years a person is supposed to live from birth. Education which
measures the average year of schooling and expected years of schooling for the population.
Gross national income (GNI) which measures the average income per person in a country.
Inflation is the independent variable used in this study and is an increase in the level
of prices of the goods and services that households buy. It is measured as the rate of change of
those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).
The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures
the percentage change in the price of a basket of goods and services consumed by households.
Unemployment rate (UEM) is independent variable that is typically calculated by
dividing the number of unemployed individuals by the total labor force this includes both the
employed and unemployed individuals and by multiplying the results by 100 to express it as a
percentage. The unemployment rate is a measurement variable that is used to quantify the
percentage of the labor force that is the unemployed activities that is seeking employment. It is
an important economic indicator that reflects the health of an economy and the availability of job
opportunity.
The Gross domestic product per capita (GDPPC) is the independent variable it
represents the total value of all goods and services produced within a country’s borders during a
specific period. Per capita means the GDP is divided by the population, providing an average
value of economic output per person. The GDPPC is a measurement variable used to assess the
average economic output or income per person in a country. It is calculated by dividing the total
GDP of a country by its population.
3.6: Model Estimation Procedure.
This proposed work will use both descriptive and inferential to analyses the data. This study will
conduct the unit root test using Augmented Dicey-Fuller (ADF, 1981) and Phillip Perron (PP,
1988) test in order to examine the stationary of the data. After the unit root test, the co-
integration test will follow, ARDL bound test depending on the outcome of the nature of the
variables based on the stationary test. Then the coefficients will be estimated, where we found a
mixture of I (0) and I (1), then the Auto Regressive Distributed Lag (ARDL) technique will be
employed to estimate the model develop by (Pesaran and Smith, 2001).
Then certain diagnostic tests will be conducted to determine the stability and the misspecification
of the model estimated. Breusch-Godfrey test will be used in testing the existence of
autocorrelation if the lag dependent variable is part of the independent variables, the correlation
matrix will be used to test the existence of multicollinearity, White test will be run to test for
Heteroscedasticity, normality of the variables using Jaque-Bera test, Ramsey's RESET technique
to test for misspecification and cumulative sum of recursive residuals (CUSUM) developed by
brown et el (1975) will be used in order to test the stability of the model.

3.5: Techniques of Data Estimation.

The data analysis consists of deciding whether the estimates of the parameters are theoretically
meaningful, economically and statistically satisfactory. The signs and magnitude of the
parameters estimates will be examined to know whether they are in conformity with their a
priori expectation. Economic a priori criterion will help the researcher to know when they are
deviating from what is actually required.
The method of data analysis will depend on the behaviors of variables in terms of unit root test.
If all the variables are in the same order of integration I (0) that is stationary at level, the study
will make use of ordinary least square (OLS). On the other hand, if the order of integration of all
the variables are mixture of both I (0) and I (1), the study will make use of ARDL model with
bound test to cointegration test.

3.5.1: Unit-Root Test.

The unit root test is important because it checks if a data series is stationary or not. To avoid
running a spurious regression the unit root test will be carried out. By so doing, we ensure the
validity of the usual test statistics (t –statistics). The Augmented Dickey-Fuller (ADF) and
Phillips Perron (PP) was used to test for stationarity in the variables.

3.6: Post-Estimation.
3.6.1: Serial-correlation Test.
The Serial correlation test would be performed to see whether the error corresponding to the
different observation is not correlated and also to ascertain if there is linear correlation between
any two set of the variables, when all other variables are held constant. The Breush-Goffery (BG)
test for autocorrelation will be used test for serial correlation in this study. The level of
significance used is 5 percent.
3.6.2: Heteroscedasticity Test.
From the word heteroskedasticity, ‘Hetero’ means ‘inconstant’ while ‘Skedasticity’ means spread
of variance. Thus, Heteroskedasticity means inconstant spread of variance. An important
assumption of the linear classical regression model is that the disturbance term in a regression
equation is homoscedastic. In line with this therefore, the presence of heteroskedasticity will
Bess tested.
3.6.3: Test for Normality.
Non-normality of error term poses problem of efficiency to the coefficients generated and also
bias of standard error. The normality assumption is that the error term must be identically
independently distributed (I.I.D), thus to test for the satisfaction of this assumption the Jaque-
Bera (JB) test for normality will be carried out.