Oil and Africa’s macroeconomy: are structural breaks important?

Abstract

AbstractThis study examines the changing impact of oil price shocks on Nigeria and South Africa. Using a structural break approach, recent studies have established the altered impact of oil price shocks consequent to the Great Moderation that commenced in the mid‐1980s. While several studies have focused on the oil–macroeconomic relationship in Africa, little attention has been paid to the variation across different periods. This study investigated the possible changing impact of oil on inflation and the real gross domestic product growth rate in the two largest African economies that are, respectively, net oil‐exporting and net importing countries. A data set from 1970 quarter 1 to 2016 quarter 4 was employed. An impulse response function was used as a referenced model while rolling impulse approach was adopted to ascertain variation across periods. Our findings show the magnitude of the impacts of oil price shocks has declined significantly since the 1990s. Several factors were adduced for the muted effects of oil in the two economies. These factors were largely driven by domestic policies and institutional reforms. Hence, not taking account of the time‐varying nature of the relationship may not provide a complete picture of the relationships between oil and macroeconomic outcomes among African countries.