SOURCE:

Faculty: Social Sciences
Department: Economics

CONTRIBUTORS:

Ijomah, M. A.
Nwogwugwu, U. C. C.

ABSTRACT:

The Nigerian economy is largely oil-dependent as it accounts for a significant proportion of the Gross Domestic Product. Also the structure of exports in Nigeria shows the acute dominance of this natural resource. This dominance is further revealed especially with regards to revenue generation by the government. Budgetary allocations are many a time made based on projections about the expected path of oil prices thus making the economy susceptible to volatility emanating from the international oil market. This research work examined oil price shocks and macroeconomic performance in Nigeria using quarterly data 1980Q1-2013Q4, the study tested for the time series properties of the variables and adopted the Variance Autoregressive (VAR) technique and the principal component-generalized autoregressive conditional heteroskedasticy (PCA-GARCH) model to estimate the models. Our results showed that oil price shocks do not have substantial effects on government spending, output, interest rate and inflation rate in Nigeria over the period covered by the study. However, the findings demonstrated that fluctuations in oil prices do substantially affect the real exchange rates in Nigeria. The study also revealed that it is not the oil price itself but rather its manifestation in real exchange rates that affects the fluctuations of aggregate economic activity proxy, the GDP. Thus, we conclude that oil price shock is an important determinant of real exchange rates and in the long run real output, while real output and real government expenditure rather than oil price shocks that affects inflation rate in Nigeria. In the light of the above findings, government should eschew unhealthy speculations in the foreign exchange, as well as rent-seeking behaviour, and adopt positive attitudes that are geared towards ensuring stable naira exchange rate.