Response of Selected Macroeconomic Variables to Oil Price Shocks in Nigeria

The question of how exchange rate, oil revenue, inflation rate and other macroeconomic variables response to oil price shocks in Nigeria has generated tremendous interests among economic scholars for decades. This study examines the responses of exchange rate, inflation rate, oil revenue and government expenditures as macroeconomic variables to oil price shocks in Nigeria using time series techniques of Vector Autoregressive (VAR) model, cointegration test, Impulse Response Function (IRFs) and Variance Decompositons (VDCs). The result of contegration test suggests the presence of cointegration among variables. The estimated VAR model affirms the response of shocks in the macroeconomic variables. The results have shown that the oil price shocks have significant response on macroeconomic variables in Nigeria. The response of inflation rate to global oil price shocks is positive, indicating that increase in oil price leads to increase in inflation rate in Nigeria; while the response of exhange rate to oil price shocks is negative, indicating that an increase in global oil price leads to depreciation of exchange rate and fall in oil revenue thereby affecting government expenditure negatively in Nigeria. Hence, the study recommends that appropriate measures such as capacity utilization of oil sector and stable macroeconomic policies as well as diversification of economy should be emphasized by Nigerian government.