Dissecting the Linkages between Variations in Crude Oil Price and Selected Macroeconomic Variables in Nigeria

Abstract

This study examines the dependency between changes in crude oil price and 15 Nigerian macroeconomic variables. We employ a monthly time series data covering the period from January 2000 to December 2019 and recently refined feasible generalized least square estimator (FGLS) which has the advantage of fixing data problems such as persistency, endogeneity, and heteroscedasticity. The findings of the study shows that oil price changes could substantially predict 10 out of 15 dependent macroeconomic variables, namely all share index, exchange rate, interest rate, inflation, GDP, market capitalization, market capitalization/GDP ratio, net foreign asset, quasi money, and total foreign reserve. 7 out of these 10 significant macroeconomic variables respond to oil price change when the predicting horizon was varied for 4 different periods. However, oil did not substantially predict GDP in the out - of - sample forecast, but did in 3/4 of the in-sample forecast. Also, the null hypothesis of no predictability applies to the remaining 5 macroeconomic variables, namely, money supply 1, money supply 2, net domestic credit, currency in circulation and demand deposit. We recommend the need for consistent monitoring of oil price behavior by regulators so as to counteract its adverse effects by the use of monetary policy and to also intensify the diversification process of other sectors of the economy.