Oil Price Asymmetry and Sectoral Output in Nigeria

Abstract

Disaggregating the Nigerian economy into oil and non-oil sector, this study investigates the asymmetric effects of oil price on sectoral output in Nigeria using data spanning the period between 1981 and 2017. It adopts the novel Nonlinear Autoregressive Distributed Lag (NARDL) model developed by Shin et al. (2014) in which short-run and long-run nonlinearities are introduced via positive and negative partial sum decompositions of oil price. The Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root test results show that the variables used in this study are a combination of I(0) and I(1) series thus justifying the use of the Bounds test approach to cointegration whose result was in the affirmative. The results of the short-run and long-run NARDL models showed that oil price has asymmetric effects on the performance of the oil and non-oil sector of the Nigerian economy in the short-run but only have long-run asymmetric effects on the non-oil sector. In addition, the results revealed that oil price shocks (positive and negative) have positive effects on non-oil output while a positive and negative oil price shock have corresponding effects on oil output in the short run. Moreover, oil price shocks have more effects on the oil sector than the non-oil sector. Hence, this study recommends that the Nigerian economy be diversified to help cushion the effects of the uncertainties associated with the global oil market and to adopt structural reforms in the non-oil tradable sector to stimulate sustainable growth of the economy.