OIL PRICE VOLATILITY AND INFLATION LEVEL IN NIGERIA: AN EXPONENTIAL GARCH APPROACH

Abstract

Over the years, expenditures of public and private sectors are regulated by the activities in the oil and gas industry. The budget of Nigeria is hinged on the international price of crude oil and any shock on oil price affects the general activities in the country. With quarterly data from the period of 1981Q1 to 2020Q2, the study uses an exponential generalized autoregressive conditional heteroscedasticity approach to examine oil price volatility and inflation level in Nigeria. An augmented Dicky-Fuller unit root test and bound test cointegration approach were used to test for stationarity and existence of long run association among the variables respectively. The study found that negative shocks in real oil price affects the volatility of the inflation level. Also, it was observed that aside real oil price volatility, interest rate and real gross domestic product volatilities affect the volatility of the inflation level. The study therefore recommends among other things that policies meant for diversification of Nigerian economy in areas like industries and agriculture should be adopted to reduce high volatility of the inflation level.