Is Climate Change a Hidden Driver of Inflation in Nigeria? Evidence from Novel Fourier Methods

ABSTRACT: Climate change is already happening on a large scale, and it is widely acknowledged as the largest issue of the twenty-first century due to the grave hazards it poses to the environment, human welfare, and progress. The primary source of climate change is the greenhouse gases that humans put into the atmosphere. Also, the primary contributor to global warming is these gases. This study investigates the link between climate change and inflation in Nigeria from Jan-97 to Dec-19. It considers average temperature and precipitation as climate change indicators. To provide a robust analysis that facilitates a nuanced examination of this dynamic relationship, this study employs state-of-the-art econometric approaches, including the Fourier autoregressive distributed lag (FARDL), fully modified least squares (FMOLS), and time-varying causality. The stationarity tests provide justification for the FARDL model. Similarly, the FARDL bound test cointegration results revealed a long-term relationship between the variables across four different models. The subsequent FARDL regression analyses focus on headline and food inflation as the dependent variables, with average temperature and precipitation as the primary explanatory variables. Further empirical of this study are as follows: (1) climate change does not significantly influence inflation in the short run. However, climate change's impact on inflation is positive and statistically significant in the long run, and (2) unidirectional causality from climate change to inflation across different time dimensions. These empirical outcomes advocate for a proactive and adaptive policy framework, emphasizing the need for the Nigerian government to adopt climate-smart policies. Similarly, it is important that the Nigerian government provide financial incentives for businesses and investors engaged in environmentally friendly projects. Doing this would enhance an ecologically sustainable economy. Integrating climate change education into the formal education system to build a future generation with a strong environmental consciousness should also be encouraged. This will potentially raise awareness about climate change and its impacts.