The Influence of Oil Price Volatility on Selected Macroeconomic Variables in Nigeria

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Abstract

The paper analyses the influence of oil price volatility on Exchange Rate Variability, External Reserves, Government Expenditure and real Gross Domestic Product using the methodology of Vector Auto-Regressive (VAR) to carry out regression analysis, impulse response function and factor error variance decomposition for robust policy recommendations. The results of the research show that unstable oil price exerts varying degrees of deleterious effect on exchange rate variability, external reserves, Government expenditure and real gross domestic product (GDP). Based on the findings of the study, we recommend the need for the country to branch out its revenue sources. This will further shield the dangle effect of the fluctuation in prices of oil. Serious policy attention should be attached to agricultural reformation, industrial policy drives, mines and mineral development to diversify Nigeria’s economy following the downward slide in the oscillations in oil prices to address the problem of excessive dependence on crude oil exportation. This will help to achieve sustainable growth and development in Nigeria.

Abstract

The paper analyses the influence of oil price volatility on Exchange Rate Variability, External Reserves, Government Expenditure and real Gross Domestic Product using the methodology of Vector Auto-Regressive (VAR) to carry out regression analysis, impulse response function and factor error variance decomposition for robust policy recommendations. The results of the research show that unstable oil price exerts varying degrees of deleterious effect on exchange rate variability, external reserves, Government expenditure and real gross domestic product (GDP). Based on the findings of the study, we recommend the need for the country to branch out its revenue sources. This will further shield the dangle effect of the fluctuation in prices of oil. Serious policy attention should be attached to agricultural reformation, industrial policy drives, mines and mineral development to diversify Nigeria’s economy following the downward slide in the oscillations in oil prices to address the problem of excessive dependence on crude oil exportation. This will help to achieve sustainable growth and development in Nigeria.

References

  • Abdulkareem, A. and Abdulhakeem, K.A. (2016), Analyzing Oil Price-Macroeconomic Volatility in Nigeria, CBN Journal of Applied Statistics Vol.7 No 1(a), 1-22

  • Adeniyi, O. A.(2011). Oil Price Shocks and Economic Growth in Nigeria: Are Thresholds Important? Department of Economics and Business Studies, Redeemers University.

  • Akram, Q. (2007). Designing Monetary Policy Using Econometric Models, Oslo Norges Bank

  • Apere O. & Ijomah A. M. (2013). Macroeconomic Impact of Oil Price Levels and Volatility in Nigeria. International Journal of Academic Research in Economics and Management Sciences 2(4), 15-25

  • Azeez, B.A.Kolapo, F. T.,Ajayi, L.B.(2012).Effect of Exchange Rate Volatility on Macroeconomic Performance in Nigeria, Interdisciplinary Journal of Contemporary Research in Business,4(1), 149-155

  • Bollerslev, T.(1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307–327.

  • Central Bank of Nigeria (2003), Annual Report and Statement of Accounts, CBN, Abuja

  • CBN. (2011). Statistical Bulletin, Vol. 21, Central Bank of Nigeria, Abuja, December.

  • Central Bank of Nigeria (2013), Annual Report and Statement of Accounts CBN, Abuja

  • Central Bank of Nigeria (2014), Annual Report and Statement of Accounts, CBN, Abuja

  • Central Bank of Nigeria (2015), Annual Report and Statement of Accounts, CBN, Abuja

  • Ebrahim, Z., Inderwildi, O.R. & King. D. A.(2014). Macroeconomic impacts of oil price volatility: mitigation and resilience, Front Energy review, 288-295

  • Elijah, U. & Festus O. E.(2008). Exchange Rate Volatility, Inflation Uncertainty and Foreign Direct Investment in Nigeria. Botswana Journal of Economics, 5(7), 14-31

  • Emefiele, G.I. (2016), Re-Introducing and Operationalizing Nigeria’s Flexible Exchange rate Market CBN Journal of Applied Statistics Vol.7 No 1(a), 375 - 378

  • Engle, R. F.(1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007

  • Engle, R.F. (1995). ARCH Selected Readings, Advanced Texts in Econometrics). Oxford: Oxford University Press.

  • Ferderer, J.P. (1996). Oil Price Volatility and the Macroeconomy, Journal of Macroeconomics, 18 (1), 1-26.

  • Gisser, M., & Godwin, T. H. (1986). Crude oil and the macroeconomy: tests of some popular notions. Journal of Money, Credit and Banking 18: 95-103.

  • Guo, H., & Kliesen, K.L. (2005). Oil price volatility and US macroeconomic activity. Review, Federal Reserve Bank of St. Louis 57 (6): 669–683.

  • Hamilton, J. D. (2005). Oil and the Macroeconomy. Prepared for Palgrave Dictionary of Economics, Department of Economics, 0508 University of California, San Diego La Jolla,

  • Hamilton, J. D. (1983). Oil and the Macroeconomy since World War II. Journal of Political Economy,, 91(2), 228-248. retrieved from http://www.jstor.org/stable/1832055

  • Hooker, M.A. (1996). “What Happened to the Oil Price Macroeconomy Relationship?” Journal of Monetary Economics 38, 195-213.

  • Iyoha, M.A (2004). Applied Econometrics, Second Edition Benin City, Nigeria Mindex Publishing Co.

  • Iyoha, M.A (2004). Macroeconomics: Theory & Policy Revised Edition. Benin City, Nigeria, Mindex Publishing Co.

  • Johansen, S. (2006). Co-integration: An Overview. In Mills, T. C. and K. Patterson (eds.), Palgrave Handbook of Econometrics, vol. 1 of Econometric Theory, UK Palgrave-MacMillan

  • Lee, K.; Shwan, N.; Ratti, R.A. (1995), Oil Shocks and the Macroeconomy: The Role of Price Variability, Energy Journal, 16, 39-56

  • Leo, V. (2OO6), Choosing an Exchange Regime: The challenges for Countries IMF, Washington DC

  • Mehrara, M. (2008). The sources of macroeconomic fluctuations in oil exporting countries: A comparative study. Economic Modelling, 24, 365–379.

  • Mohaghegh, M. & Mehrara, M. (2011). Macroeconomic Dynamics in the Oil Exporting Countries: A Panel VAR study. International Journal of Business and Social Science, 2(21), 288-295

  • Mordi, C. N. O. (2006). Challenges of Exchange Rate Volatility in Economic Management in Nigeria. Central Bank of Nigeria, 30(3)

  • Mork, K. (1989), Oil and the Macroeconomy, When Prices Go Up and Down: An Extension of Hamilton’s Results, Journal of Political Economy, 97, (51)

  • Mork, K. A. O., Olsen,O. & Mysen, H. (1994). Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries, Energy Journal, 15,19 -35.

  • Narayan, P., & Narayan, S. (2007). Modeling oil price volatility, Energy Policy 35, 6549–6553

  • Nelson, D. B. (1991), Conditional heteroskedasticity in asset returns: a new approach. Economietrica, 59, 347-370.

  • Olowe, R. A. (2009). Oil Price Volatility and the Global Financial Crisis. Paper presented at 9th Global Conference on Business & Economics, Cambridge University, UK

  • Omojolaibi. A.J. (2013).Does Volatility in Crude Oil Price Precipitate Macroeconomic Performance in Nigeria? International Journal of Energy Economics and Policy, 3(2), 143-152.

  • Oriakhi, D.E & Osaze, D.I. (2013) Oil Price Volatility and its Consequences On The Growth Of The Nigerian Economy: An Examination (1970-2010) Asian Economic and Financial Review, 2013, 3(5), 683-695

  • Salisu, A.A. & Fasayan, I.O. (2013), Modeling oil price volatility with structural breaks. Energy Policy, 52, 554-562.

  • Taiwo, M., Abayomi, T. & Damilare O. (2012), Crude Oil Price, Stock Price and Some Selected Macroeconomic Indicators: Implications on the Growth of Nigeria Economy, Research Journal of Finance and Accounting, 3(2), 42-48.

  • Wilson, A. David, U. Inyiama, O. & Beatrice, E. (2014). Oil price volatility and conomic development: Stylized evidence in Nigeria. Journal of Economics and International Finance, 6(6), 125-133

  • Zakoian J.M. (1994). Threshold heteroskedastic models, Journal of Economic Dynamics and Control 18: 931-955

Abdulkareem, A. and Abdulhakeem, K.A. (2016), Analyzing Oil Price-Macroeconomic Volatility in Nigeria, CBN Journal of Applied Statistics Vol.7 No 1(a), 1-22

Adeniyi, O. A.(2011). Oil Price Shocks and Economic Growth in Nigeria: Are Thresholds Important? Department of Economics and Business Studies, Redeemers University.

Akram, Q. (2007). Designing Monetary Policy Using Econometric Models, Oslo Norges Bank

Apere O. & Ijomah A. M. (2013). Macroeconomic Impact of Oil Price Levels and Volatility in Nigeria. International Journal of Academic Research in Economics and Management Sciences 2(4), 15-25

Azeez, B.A.Kolapo, F. T.,Ajayi, L.B.(2012).Effect of Exchange Rate Volatility on Macroeconomic Performance in Nigeria, Interdisciplinary Journal of Contemporary Research in Business,4(1), 149-155

Bollerslev, T.(1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307–327.

Central Bank of Nigeria (2003), Annual Report and Statement of Accounts, CBN, Abuja

CBN. (2011). Statistical Bulletin, Vol. 21, Central Bank of Nigeria, Abuja, December.

Central Bank of Nigeria (2013), Annual Report and Statement of Accounts CBN, Abuja

Central Bank of Nigeria (2014), Annual Report and Statement of Accounts, CBN, Abuja

Central Bank of Nigeria (2015), Annual Report and Statement of Accounts, CBN, Abuja

Ebrahim, Z., Inderwildi, O.R. & King. D. A.(2014). Macroeconomic impacts of oil price volatility: mitigation and resilience, Front Energy review, 288-295

Elijah, U. & Festus O. E.(2008). Exchange Rate Volatility, Inflation Uncertainty and Foreign Direct Investment in Nigeria. Botswana Journal of Economics, 5(7), 14-31

Emefiele, G.I. (2016), Re-Introducing and Operationalizing Nigeria’s Flexible Exchange rate Market CBN Journal of Applied Statistics Vol.7 No 1(a), 375 - 378

Engle, R. F.(1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007

Engle, R.F. (1995). ARCH Selected Readings, Advanced Texts in Econometrics). Oxford: Oxford University Press.

Ferderer, J.P. (1996). Oil Price Volatility and the Macroeconomy, Journal of Macroeconomics, 18 (1), 1-26.

Gisser, M., & Godwin, T. H. (1986). Crude oil and the macroeconomy: tests of some popular notions. Journal of Money, Credit and Banking 18: 95-103.

Guo, H., & Kliesen, K.L. (2005). Oil price volatility and US macroeconomic activity. Review, Federal Reserve Bank of St. Louis 57 (6): 669–683.

Hamilton, J. D. (2005). Oil and the Macroeconomy. Prepared for Palgrave Dictionary of Economics, Department of Economics, 0508 University of California, San Diego La Jolla,

Hamilton, J. D. (1983). Oil and the Macroeconomy since World War II. Journal of Political Economy,, 91(2), 228-248. retrieved from http://www.jstor.org/stable/1832055

Hooker, M.A. (1996). “What Happened to the Oil Price Macroeconomy Relationship?” Journal of Monetary Economics 38, 195-213.

Iyoha, M.A (2004). Applied Econometrics, Second Edition Benin City, Nigeria Mindex Publishing Co.

Iyoha, M.A (2004). Macroeconomics: Theory & Policy Revised Edition. Benin City, Nigeria, Mindex Publishing Co.

Johansen, S. (2006). Co-integration: An Overview. In Mills, T. C. and K. Patterson (eds.), Palgrave Handbook of Econometrics, vol. 1 of Econometric Theory, UK Palgrave-MacMillan

Lee, K.; Shwan, N.; Ratti, R.A. (1995), Oil Shocks and the Macroeconomy: The Role of Price Variability, Energy Journal, 16, 39-56

Leo, V. (2OO6), Choosing an Exchange Regime: The challenges for Countries IMF, Washington DC

Mehrara, M. (2008). The sources of macroeconomic fluctuations in oil exporting countries: A comparative study. Economic Modelling, 24, 365–379.

Mohaghegh, M. & Mehrara, M. (2011). Macroeconomic Dynamics in the Oil Exporting Countries: A Panel VAR study. International Journal of Business and Social Science, 2(21), 288-295

Mordi, C. N. O. (2006). Challenges of Exchange Rate Volatility in Economic Management in Nigeria. Central Bank of Nigeria, 30(3)

Mork, K. (1989), Oil and the Macroeconomy, When Prices Go Up and Down: An Extension of Hamilton’s Results, Journal of Political Economy, 97, (51)

Mork, K. A. O., Olsen,O. & Mysen, H. (1994). Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries, Energy Journal, 15,19 -35.

Narayan, P., & Narayan, S. (2007). Modeling oil price volatility, Energy Policy 35, 6549–6553

Nelson, D. B. (1991), Conditional heteroskedasticity in asset returns: a new approach. Economietrica, 59, 347-370.

Olowe, R. A. (2009). Oil Price Volatility and the Global Financial Crisis. Paper presented at 9th Global Conference on Business & Economics, Cambridge University, UK

Omojolaibi. A.J. (2013).Does Volatility in Crude Oil Price Precipitate Macroeconomic Performance in Nigeria? International Journal of Energy Economics and Policy, 3(2), 143-152.

Oriakhi, D.E & Osaze, D.I. (2013) Oil Price Volatility and its Consequences On The Growth Of The Nigerian Economy: An Examination (1970-2010) Asian Economic and Financial Review, 2013, 3(5), 683-695

Salisu, A.A. & Fasayan, I.O. (2013), Modeling oil price volatility with structural breaks. Energy Policy, 52, 554-562.

Taiwo, M., Abayomi, T. & Damilare O. (2012), Crude Oil Price, Stock Price and Some Selected Macroeconomic Indicators: Implications on the Growth of Nigeria Economy, Research Journal of Finance and Accounting, 3(2), 42-48.

Wilson, A. David, U. Inyiama, O. & Beatrice, E. (2014). Oil price volatility and conomic development: Stylized evidence in Nigeria. Journal of Economics and International Finance, 6(6), 125-133

Zakoian J.M. (1994). Threshold heteroskedastic models, Journal of Economic Dynamics and Control 18: 931-955

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