RESPONSE OF SELECTED MACROECONOMIC VARIABLES TO OIL PRICE SHOCKS IN NIGERIA

Abstract

The question of how the exchange rate, oil revenue, inflation rate and other
macroeconomic variables respond to oil price shocks in Nigeria has generated tremendous
interest among economic scholars for decades. This study examines the responses of the
exchange rate, inflation rate, oil revenue and government expenditures as macroeconomic
variables to oil price shocks in Nigeria using time series techniques of the Vector
Autoregressive (VAR) model, cointegration test, Impulse Response Function (IRFs) and
Variance Decompositions (VDCs). The result of the cointegration test suggests the presence of
cointegration among variables. The estimated VAR model affirms the response of shocks in
the macroeconomic variables. The results have shown that the oil price shocks have a
significant response to macroeconomic variables in Nigeria. The response of the inflation rate
to global oil price shocks is positive, indicating that an increase in oil price leads to an increase
in the inflation rate in Nigeria; in contrast, the response of the exchange rate to oil price shocks
is negative, indicating that an increase in global oil price leads to depreciation of exchange rate
and 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 the
oil sector, and the Nigerian government should emphasize stable macroeconomic policies as
well as diversification of the economy