Oil Price Shocks and the Nigeria Economy: A Variance Autoregressive (VAR) Model

Abstract

Oil prices have been highly volatile since the end of World War II. The volatility becomes even more serious in recent time. This has implications for the economies of oil exporting countries, particularly oil dependent countries like Nigeria. The paper examined the impact of these fluctuations on macroeconomic of Nigeria. Using VAR, the impact of crude oil price changes on four key macroeconomic variables was examined. The results show that oil prices have significant impact on real GDP, money supply and unemployment. It impact on the fourth variable, consumer price index is not significant. This implies that three key macroeconomic variables in Nigeria are significantly explained by exogenous and the highly volatile variable. Hence, the economy is vulnerable to external shocks. Consequently, the macroeconomic performance will be volatile and macroeconomic management will become difficult. Diversification of the economy is necessary in order to minimize the consequences of external shocks.