Abstract
This study investigated the relative Granger causal effects of oil price on exchange rate, trade balance, and foreign reserve in Nigeria. We used seasonally adjusted quarterly data from 1986Q4 to 2018Q1 to remove predictable changes in the series. Given the non-stationarity of our variables, we found cointegration to exist only between oil price and foreign reserve. The presence of cointegration implied the existence of long run relationship between the variables. The Granger causality result showed that oil price strongly Granger caused foreign reserve in the short period. However, no Granger causal relationships were found between oil price and trade balance and for oil price and exchange rate. The implication of the result is that Nigerian government should not rely solely on oil price to sustain her reserve but to diversify the economy towards non-resource production and export for foreign exchange generation.
Highlights
Crude oil has been the largest component of the volume of export in Nigeria ever since in the 1970s when the non-renewable commodity was found in commercial quantities
Our results show that short term causality exists from oil price to foreign reserve while causality is not found from oil price to trade balance and exchange rate, respectively
The frequency domain causality is carried out after ensuring the stationarity of the variables to investigate the causal effects of oil price on reserve, trade balance, and exchange rate in Nigeria
Summary
Crude oil has been the largest component of the volume of export in Nigeria ever since in the 1970s when the non-renewable commodity was found in commercial quantities. Crude oil accounts for almost 83.5 percent of the total export in the country (Centre for Study of Economies of Africa 2018). Crude oil has been the major driver of the Nigerian economy and any changes in its price usually have significant effects on the structure and the growth and welfare of the citizens. The situation in the country is exportation of crude oil and importation of refined petroleum product at higher cost. This cost implication has a significant impact on the trade balance and the macroeconomic performance of the country
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