Oil price shocks and the macroeconomy of Nigeria: a non-linear approach

Abstract

Nowadays, the impact of oil price shocks is pervasive as it virtually affects all facets of human endeavor. As such, it is pertinent that we should know the relationship between oil price shocks and the macroeconomy. Therefore, this paper assesses empirically, the effects of oil price shocks on the real macroeconomic activity in Nigeria. Granger causality tests and multivariate VAR analysis were carried out using both linear and non-linear specifications. Inter alia, the latter category includes two approaches employed in the literature, namely, the asymmetric and net specifications oil price specifications. The paper finds evidence of both linear and non-linear impact of oil price shocks on real GDP. In particular, asymmetric oil price increases in the non-linear models are found to have positive impact on real GDP growth of a larger magnitude than asymmetric oil price decreases adversely affects real GDP. The non-linear estimation records significant improvement over the linear estimation and the one reported earlier by Aliyu (2009). Further, utilizing the Wald and the Granger multivariate and bivariate causality tests, results from the latter indicate that linear price change and all the other oil price transformations are significant for the system as a whole. The Wald test indicates that our oil price coefficients in linear and asymmetric specifications are statistically significant. JEL Classification Codes E32, E37Key words: Oil Shocks, Macroeconomy, Granger Causality, Asymmetry, Vector Autoregressive IntroductionAs an oil exporter and importer of refined petroleum products, Nigeria is potentially vulnerable to oil price volatility. A large body of research suggests that oil price volatility tends to exert a positive effect on the GDP growth for a net oil exporting country and a negative effect on net oil importing countries. Theoretical literature has identified the transmission mechanisms through which oil prices affect real economic activity to include both supply and demand channels. The supply side effects relate to the fact that crude oil is a basic input to production and commerce, and hence an increase in oil price leads to a rise in production and distribution costs that induces firms to lower output. Changes in oil price also entail demand-side effects on consumption and investment. Consumption is affected indirectly through its positive relation with disposable income while investment is adversely affected indirectly because such increase in oil price also 1 . Shehu Usman Rano Aliyu, PhD, is an Associate Professor in the Department of Economics, Bayero University, Kano and also worked as a visiting scholar on Sabbatical leave in the Research Department of Central Bank of Nigeria. Email: susaliyu@yahoo.co.uk, Mobile: +2348037875246.2 affects firms' input prices and thereby increasing their costs. Oil price changes also influence foreign exchange markets and generate stock exchange panics, higher interest rate, produce inflation and eventually lead to monetary and financial instability...

Oil prices and stock market price in Nigeria

“…As argued above, studies have examined the relationship between oil price and stock market price in developed oil importing countries, while in developing countries, there is a lack of literature in this gap in knowledge. With respect to Nigeria, studies on oil price have mostly centred on oil price–economic growth issue (see Ayadi, ; Olomola and Adejumo, ; Omisakin, ; Akpan, ; Aliyu, 2009a,b; Gunu and Kilishi, ). These studies failed to consider the potential effect of oil prices on stock market price.…”

Exploring oil price—exchange rate nexus for Nigeria

“…A significant number of studies have looked at the relationship between oil price and selected macro economic variables (including exchange rates) in Nigeria (see, e.g. Ayadi, 2005; Olomola and Adejumo, 2006; Akpan, 2009; Aliyu, 2009, 2011; Mahmud, 2009 and Chuku et al ., 2011). However, there are limited studies that have looked exclusively at the oil price exchange rate nexus.…”

The impact of domestic pricing of petrol on economic growth of Nigeria (1970 – 2013)

“…The study thus, concludes in his words "the discovery, of oil has been a curse rather than a blessing". Aliyu (2009), examined the effect of oil price shock as well as real exchange rate volatility on the real GDP of Nigerian economy. The outcome of the long-term analysis shows that a 10 percent increase in the prices of crude oil will move the real GDP upward by 7.72 per cent, likewise a 10 percent rise in exchange rate leads to a rise in GDP by 0.35 per cent.…”