RESPONSE OF SELECTED MACROECONOMIC VARIABLES TO OIL PRICE SHOCKS IN NIGERIA

Abstract

The question of how the exchange rate, oil revenue, inflation rate and othermacroeconomic variables respond to oil price shocks in Nigeria has generated tremendousinterest among economic scholars for decades. This study examines the responses of theexchange rate, inflation rate, oil revenue and government expenditures as macroeconomicvariables to oil price shocks in Nigeria using time series techniques of the VectorAutoregressive (VAR) model, cointegration test, Impulse Response Function (IRFs) andVariance Decompositions (VDCs). The result of the cointegration test suggests the presence ofcointegration among variables. The estimated VAR model affirms the response of shocks inthe macroeconomic variables. The results have shown that the oil price shocks have asignificant response to macroeconomic variables in Nigeria. The response of the inflation rateto global oil price shocks is positive, indicating that an increase in oil price leads to an increasein the inflation rate in Nigeria; in contrast, the response of the exchange rate to oil price shocksis negative, indicating that an increase in global oil price leads to depreciation of exchange rateand fall in oil revenue thereby affecting government expenditure negatively in Nigeria. Hence,the study recommends that appropriate measures be taken, such as capacity utilization of theoil sector, and the Nigerian government should emphasize stable macroeconomic policies aswell as diversification of the economy