Oil price shocks pass‐through to domestic prices in Nigeria

Abstract

AbstractThe study investigated the potential non‐linear impacts of fluctuations in oil prices on domestic prices in Nigeria. Utilising the non‐linear autoregressive distributed lag (NARDL) model, the study revealed the presence of asymmetry in the behaviour of domestic prices. Both forms of oil price shocks were observed to have a negative influence on domestic prices in the short term, with only positive oil price shocks demonstrating statistical significance. However, in the long run, a distinct pattern emerged where a decrease in oil prices significantly affected domestic prices. Additionally, analysis of VAR impulse response showed a consistently negative reaction of domestic prices to oil price shocks, falling below the steady‐state equilibrium. The study concluded that changes in oil prices, in conjunction with other macroeconomic variables, affected the prices of domestic goods in Nigeria, whether in the short or long term. This underscored the complexity of Nigeria's economic landscape. Consequently, it is advisable to prudently invest excess revenue generated from rising oil prices to mitigate the adverse impacts of negative oil shocks on the economy.