Crude oil price dynamics and transmission mechanism of the macroeconomic indicators in Nigeria

• Author: Joseph Ayoola Omojolaibi
• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/opec.12031

Crude oil price dynamics and transmission

mechanism of the macroeconomic

indicators in Nigeria

Joseph Ayoola Omojolaibi, PhD

Research Fellow, Department of Economics, Faculty of the Social Sciences, University of Lagos,

Akoka-Lagos, Nigeria. Email: omojo_laibi@yahoo.com

Abstract

The preoccupation of this study is to investigate the dynamic impacts of crude oil price on the eco-

nomic growth of Nigeria. The technique of estimation used in this study is the structural vector

autoregressive type. This method is applied to articulate the transmission mechanism of macroeco-

nomic effects of domestic price level,economic output, money supply and volatile crude oil price in

Nigeria.The study sample covers the period between 1985 and 2010.The data used are on a quar terly

basis. The results of both the impulse response functions and the forecast error variance decomposi-

tions indicate that domestic shocks are responsible for a reasonable portion of crude oil price fluc-

tuations. Although crude oil price volatility has significant positive impacts on economic output,

however, money supplyshocks are the main cause of g ross domestic product fluctuations.This study

concludes that crude oil price has very important impact on the Nigerian economy and the monetary

policy is the channel through which this impact transmits.

1. Introduction

Energy plays the central role in the world economy. In spite of considerableinclination to

alternative renewablesources of energy like wind, water, nuclear and solar power, the role

of crude oil in macroeconomic movements has not waned yet. So, oil shocks may have

macroeconomic consequences in both oil-exporting and oil-importing countries. In the

former group, oil is the major source of revenue and in the latter, it is a major input for pro-

duction system. Despite—and may be due to—this mutual strategic importance, oil price

is highly volatile; even more than any other commodity (Dehn, 2001). Likewise, its fluc-

tuations are hardly predictable. These facts led to a great number of researchers studying

the effects of oil price changes on economic activity, identifying the mechanisms through

which these effects transmit, and proposing effective monetary and fiscal policies to

prevent negative impacts of such shocks (e.g. Hamilton, 1983, 1996; Bernanke et al.,

1997; Bernanke, 2004; Devlin and Lewin, 2004).These studies found that oil price change

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