Abstract
The aim of the study is to find the empirical analyses of the impact of oil price fluctuation on the monetary instrument in Nigeria, by looking at their relationships. Specifically, we analyzed the role of Exchange rate, Inflation, Interest rate and how they respond to shocks in oil price. We explored the frequently used Toda–Yamamoto model (TY), by adopting the TY Modified Wald (MWALD) test approach to causality, Forecast Error Variance Decomposition (FEVD) and Impulse Response Functions (IRFs). The study covered the period Q1 1995 to Q4 2018, and our findings from MWALD test indicated that there is a uni-directional causality at 5% level of significance a response of lnintr due to positive change in lnoilpr and next, and the combination of variables with lnintr as a dependent variable contributed to it changes. This also corroborates with our findings in FEVD, of lnintr, contributing to its future error variation of 97.41%, 60.94% and 54.34% for the first, ninth and tenth year, and followed by lnoilpr, contributing 24.86% and 31.12% in the ninth and tenth year, also lnexcr contributes 10.35%, 10.80% and 10.19% in fourth, fifth and sixth year into the future, this indicates also a strong causal relationship into the future. The IRFs also complement our findings, where we observed that the relationship between lnoilpr independent variable and lnintr as the dependent variable is an inverse relationship, while other independent variables are positive.Keywords: Oil Price, Exchange rate, Inflation, Interest rate, Toda–Yamamoto.JEL Classifications: Q1, Q3, Q41, Q47DOI: https://doi.org/10.32479/ijeep.9493
Highlights
Crude petroleum is one of the fundamental sources of energy in the world and plays an important role in economic growth and development of many economies
Stationarity Tests the Todo-Yamamoto model, the modified Wald (MWALD) test was introduced for ease of estimation by circumventing the presence of unit roots pre-testing problem, there is need to determine the maximum order of integration of the variables, which is necessary for estimation of The MWALD test for Granger causality by Toda and Yamamoto (1995)
The unit roots tests confirmed all our process to be considered integrated at first difference and at 1% level of significance using Augmented Dickey-Fuller (ADF) test, Phillips – Perron (PP) and Kwiatkowski, Phillips, Schmidt, and Shin (KPSS). This corroborates with the work of Yakubu and Abdul Jalil in their test of stationarity. These test of stationarity are in contrast when Dickey and Fuller, Elliott-Rothenberg-Stock test statistic and Ng-Perron test statistics are applied to test for the stationarity on the same variable
Summary
Crude petroleum is one of the fundamental sources of energy in the world and plays an important role in economic growth and development of many economies. Hamilton (2009), Blanchard and Gali (2007), viewed, changes in the price of oil as an imperative source of economic fluctuations, in which the resultant effect led to global shock, capable of affecting many economic activities instantaneously. This shock is perceived generally to have a similar impact due to events like fall in growth rate, high unemployment rate, and high inflation rate, while the magnitude and the causes of the effect of these shocks may differ. According to (Adedokun, 2018), (NNPC, 2016), the economy of Nigeria was affected by the decline in the revenue due to a fall in the price of crude oil alongside production. they cited that in about 20 months, the oil price has nosedived rapidly from as high as about one hundred and thirty dollars per barrel to as low as twentyeight dollars and quantity dropped from 2.15 Mbpd to 1.81 Mbpd in the earlier months of 2016, this resulted to a recession
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