REAL OUTPUT AND OIL PRICE UNCERTAINTY IN AN OIL PRODUCING COUNTRY

Abstract

Sudden changes in oil prices have been a major concern for countries – oil producing and non-oil producing countries alike. Due to this, we assessed the effects of such an uncertainty on the real output of Nigeria, an oil producing country, during the period 1980:1 to 2014:4. We achieved this objective by using a vector autoregressive model that permits us to decompose oil price uncertainty into positive and negative uncertainties. We then quantified the responses of real output to these uncertainties. Using the conditional variance of the returns in the composite refiners’ acquisition cost of crude oil deflated by US GDP deflator as our measure of oil price uncertainty, we found that a positive uncertainty leads to a decline in real output, while a negative uncertainty leads to a rise in real output. The response of real output to these uncertainties is asymmetric.