Abstract

This study investigated the applicability of the three - prong model advanced by Gordon to explain the requisite trade-off between employment and low inflation in the Nigerian economy. This triangular model which controls for the effect of the output level, inertia, and the output change in has been argued by Gordon as being capable of obviating the biased results inherent in the conventional approach. The conventional approach was based on the regression of the price level change on either the deviation of actual unemployment arising from the nonaccelerating inflation rate of unemployment (NAIRU) or the gap in output. The study was constrained to estimate the Phillips Curve based on price inflation and output due to the absence of quarterly unemployment data. Hodrick-Prescott (HP) filters on annual data were utilised in the long run estimation covering the period of 1980 to 2012 after the Augmented Dickey-Fuller; applying the validation of Unit Roots test on Ordinary Least Squares (OLS) technique. The post estimation diagnostic tests applied are the White and the Breusch-Godfrey tests. The result shows limited evidence of inertia effects (output gap) on inflation gap exists in Nigeria. It is only obtainable at 10% significance level via the rate of change effect of the positive output gap ? ) on inflation gap. Also, the terms-of-trade variable was insignificant in determining the action of inflation gap. However, labour cost is statistically significant at 5 percent level. The implication of these findings is that the anti-inflationary, monetary policy, even as much as it affects the demand side of the economy, does not really influence inflation. However, evidence revealed by the inflation gap (lagged) suggests the non-functioning of monetary policy. The postulated converse relationship between unemployment rate and inflation rate is not applicable in Nigeria. The policy makers are enjoined to provide adequate information in a transparent manner, explaining the justification for the enunciated economic policies in order to reduce information asymmetry upon which wrong expectation may be based.