An inflation shock based scenario analysis of causal relations between foreign direct investment (FDI) in agriculture and agricultural output in Nigeria was conducted using data that spanned between 1960 and 2008. Augmented Dickey-Fuller test, Johansen co integration procedure, error correction model, granger causality test and impulse response were employed as methods of data analyses. The results revealed that no long run equilibrium relationship exists between FDI in agriculture and agricultural output in Nigeria both in the presence of inflation shock and in its absence. However, while short run causal influence flows from FDI in agriculture to agricultural output, no short run influence runs from the latter to the former with inflation playing negative role on the short run influence of FDI in agriculture on agricultural output. The persistent responses of both variables in opposite direction to exogenous shocks to the system consolidate the findings that no long run relationship exists between these variables. The study recommends that policy that encourages FDI in agriculture should be stemmed up with more attention paid to inflation control.
Key words: Foreign direct investment (FDI) in agriculture, agricultural production, inflation shock, long run relationship, granger causality.
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