Oil Price Fluctuation, Monetary Policy and Output Growth in Nigeria

doi:10.7176/jesd/12-24-06

Abstract

This study examines the dynamic relationship among Oil Price Fluctuation, Monetary Policy and Output Growth in Nigeria between the periods of 1986 to 2019. Time series data was used for the analysis and Vector Autoregression Model was also employed in this study. The estimation of the VAR showed that Gross Domestic Product growth rate has a negative response to the shocks of foreign interest rate, prime lending rate, real effective exchange rate and output gap but has a positive response to the shocks of oil price volatility and money supply. The result also showed that foreign interest rate has a positive response to real effective exchange rate and a negative response to Oil Price Volatility, Money Supply, Prime Lending Rate and Output Gap. The shocks to the money supply and real effective exchange rate have a positive effect on oil price volatility, whereas the output gap has a negative effect. The study concluded that output gap has a positive response to the shocks of gross domestic product growth rate and prime lending rate but a negative response to the shock of real effective exchange rate and asymmetric response to the shocks of money supply, foreign interest rate and oil price volatility. Keywords: Oil Price Volatility, Monetary Policy, Output Growth, Vector Autoregressive Model, Unit Root Test DOI: 10.7176/JESD/12-24-06 Publication date: December 31 st 2021

Highlights

Crude oil is one of the world's most essential commodities nowadays, as it is a crucial source of energy to many countries of the world
The result showed that foreign interest rate has a positive response to real effective exchange rate and a negative response to Oil Price Volatility, Money Supply, Prime Lending Rate and Output Gap
The study concluded that output gap has a positive response to the shocks of gross domestic product growth rate and prime lending rate but a negative response to the shock of real effective exchange rate and asymmetric response to the shocks of money supply, foreign interest rate and oil price volatility

Summary

Introduction

Crude oil is one of the world's most essential commodities nowadays, as it is a crucial source of energy to many countries of the world. According to the World Bank (2017), Nigeria's output growth decreased from 8.03 percent to 4.23 percent between 2009 and 2012, owing to a drop in oil prices and a drop in foreign reserves, putting pressure on inflation and the exchange rate. In the light of the above issues, this study specific objective is to look at the dynamic interaction among oil price fluctuation, monetary policy and output growth in Nigeria This theory has been widely used by different researchers such as Hamilton (1983); Goodwin (1985); Laser (1987); Gisser (1985); and Hooker (1986). Olomola (2006) investigated the impact of oil price shocks on Nigerian output, inflation, real exchange rate, and money supply He analyzed quarterly data from 1970 to 2003. The study indicated that a high real oil price can cause a wealth effect, which raises the real exchange rate and squeezes the tradable sector, resulting in the "Dutch Disease Syndrome."

Methodology

Analysis, Estimation and Results

Conclusion