International Reserve and Oil Price Movement: Evidence from Nigeria

Abstract

The impact of oil price changes 011 aggregate economic activities has been a focal point of research since the 1970s and the research has often produced mixed results. For a small, open oil-exporting country like Nigeria, the effect of oil price changes is expected to be strong on international reserves accumulation. This paper examines the relationship within the Mundell-Fleming framework with special focus on Nigeria. Using a Vector Autoregressive (VAR) Model, this study explores the linkage over the period 1960-2011 and finds that oil price affected reserve holding in the long-run with relatively minimal effects in the short-run. While results of the impulse response functions showed that oil price affected external reserve holding. variance decomposition analysis revealed a marginal impact.