Oil Price Shocks and Nigeria's Economic Activity: Evidence from ARDL Co-Integration and VECM Analysis

Abstract

This study examines the impact of oil price shocks and their transmission channels to selected macroeconomic variables which serve as proxies for economic activities in Nigeria using quarterly data from 1980Q1 to 2011Q4. Empirical analysis was carried out using VAR framework. Further the Impulse response function (IRF) and the variance decomposition (VDC) were carried out to trace the impact of oil shocks to the Nigerian economy. The result shows that oil price shocks have negative impact on nearly all the variables used in the analysis; furthermore the asymmetric relationship between oil price shocks and GDP was not established as the effects was found to be minimal in all the tests results. The result clearly illustrates that oil price decreases affects most of the macroeconomic indicators than increases. Specifically, oil price decrease affects trade balance, inflation, government revenue and exchange rate. The implications are that oil price decreases affects macroeconomic activity in Nigeria than increases as most of the variables except inflation did not respond to increases. Based on the findings it was recommended that a relaxation of monetary policy during an oil price fluctuation era as the government has already through the central bank adopted a inflation targeting policy in order to protect the economy from possible outcome of a full blown stagflation among others.