Oil-growth nexus in Nigeria: An ADL-MIDAS approach

Abstract

In this study, we investigate the effect of oil price on the real GDP growth of Nigeria. We contribute to the extant literature on oil price-growth nexus in three ways. First, we employ one of the recently developed Mixed Data Sampling models owing to its ability to accommodate both high and low data frequencies in the same predictive model. Second, we examine the impact of crude oil price on aggregate as well as sectoral output growth, with focus on agriculture, industry and service sectors. Third, we account for the role of macroeconomic/control variables and crude oil price asymmetry. Our results show that accounting for crude oil price asymmetry and macroeconomic determinants increases the predictability of the ADL-MIDAS model for the oil price-growth nexus. On the aggregate, we find that negative oil price changes significantly reduce economic growth while positive oil price changes do not increase economic growth significantly. The sectoral analyses show that the service and industry sectors are more affected by the negative oil price changes than the agriculture sector. Overall, we conclude that the impact of government participation in the economy remains huge and the situation whereby recurrent to capital expenditure ratio of government is about 80/20 percent dampens the growth potential of the Nigerian economy. More investment in capital infrastructure relative to recurrent expenditure is recommended, to reduce the adverse effect of negative crude oil price on economic growth in Nigeria.