Oil Price Shocks and Macroeconomic Performance in Nigeria

This paper examines the macroeconomic implications of symmetric and asymmetric oil price and oil revenue shocks in Nigeria, using the vector autoregressive (VAR) estimation technique. The paper finds that both positive and negative oil price shocks influence real government expenditure only in the long run rather than in the short run, while examining positive and negative shocks to external reserves revealed stronger implications for expenditure in the long run, with positive rather than negative oil price shocks having stronger short and long run effects on real GDP, and therefore triggering inflationary pressure and domestic currency depreciation as importation rises. This implies that the country exhibits the Dutch disease syndrome in the short and long run. However, results obtained show that oil revenue shocks are capable of impeding economic growth only in the long run while raising general price levels marginally in the short run after the initial shocks, with evidence of serious threat to interest rate and the domestic currency in the short and medium term, as the volume of imports increases significantly along with the external reserves. Findings on the asymmetric effects of oil revenue shocks revealed that positive shocks to oil revenue stimulate expansionary fiscal posture in the Nigerian economy in the short run in line with theory, thereby creating inflationary pressure and domestic currency depreciation. The combined implications of these discoveries suggest the need for proper coordination of fiscal and monetary policy for sustainable macroeconomic stability to be achieved.